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Turkey ETF Jumps as Central Bank Sharply Hikes Rates

This article was originally published on ETFTrends.com.

The Turkey country-specific ETF climbed Thursday after the Central Bank of the Republic of Turkey aggressively hiked interest rates by 6.25 percentage points in a bid to clamp down on runaway inflation and prop up its lira currency.

The iShares MSCI Turkey ETF (TUR) advanced 5.9% Thursday. TUR has plunged 50.2% year-to-date.

Defying President Recep Tayyip Erdogan’s demand to keep rates low, the central bank raised its main interest rate to 24% from 17.75% due to concerns over price stability and argued it would tightly monitor monetary policy until the inflation outlook improves significantly, the Wall Street Journal reports.

The central bank's actions eased investor concerns over the institute's independence from Erdogan, who has championed a low rate policy, which has heavily weighed on the lira currency this year.

“This was much bigger than expected. It sends a signal to the market and it’s a good signal,” Kevin Daly, portfolio manager for emerging-market debt at Aberdeen Standard Investments, told the WSJ. “It gives you some confidence in the lira that you might be able to buy this thing again.”

The lira currency appreciated 4.3% against the U.S. dollar to TRY6.0826 Thursday.

However, some analysts believe that further interest rate hikes may be needed to fully rein in inflation, which is expected to further accelerate given the lira's 40% devaluation against the USD this year. Turkey's inflation surged to 18% in August as the weakness in the lira pressured the prices on a number of goods and imports.

The central bank, though, will be walking a very precarious tightrope act as it tries to balance rate hikes with inflation as a much higher rate would pressure Turkish economic growth. Turkey's economy expanded 5.2% in the second quarter but is expected to slow and potentially contract in the second half of the year.

“Today’s move is a decisive step in the right direction. But we need to see if they keep this tightening until inflation starts to cool,” Diana Amoa, emerging-markets portfolio manager at JPMorgan Asset Management, told the WSJ. “For Turkey, it’s still a fight for its lost credibility.”

For more information on the Turkish markets, visit our Turkey category.