Turkey: Fitch Ratings Supports Banking Sector

Inflation with an annual rate of over 75 percent continues to cause concern

Mehmet Simsek

Fitch Ratings International has revised its outlook on Turkey’s banking sector upward, changing the outlook from “neutral” to “improving.” As Fitch Ratings analysts wrote in a statement, “Strategic investors’ confidence in Turkey’s political system has recently increased, leading to an improvement in the foreign exchange reserves’ position of the Turkish Central Bank.” In addition, the ability of Turkish credit institutions to access foreign financial resources has been improved.

In this context, Turkey’s Daily Sabah recalled that since last June, the Turkish Central Bank “has gradually raised the interest rate from 8.5% to 50% in order to curb inflation.” A month ago, the Turkish Central Bank’s Monetary Policy Board halted the hike cycle by reaffirming the benchmark rate at 50 percent.

Nevertheless, a spokesman for Turkey’s regulator said that “the restrictive orientation of monetary policy will remain in place until a significant and permanent decline in the basic trend of monthly inflation is achieved.” That is, if there is a significant and persistent deterioration in inflation, the stance of monetary policy will be tightened again.

Turkey’s annual inflation rate in May (latest available data) was 75.45%, up 5.65% from the previous month and the highest in 18 months. However, Turkish Minister of Economy and Finance Mehmet Simsek tried to calm both Turkish public opinion and international investors by saying that “the worst is over.” Inflation was driven primarily by price increases in sectors such as education, real estate, restaurants, and health care.