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Sanctions risks increase Turkish bank vulnerability

With Turkey maintaining its ties with Russia, the risk of secondary sanctions against Turkish banks rises. But even if such sanctions are targeted, the central bank’s policies are already risking a deeper crisis.

Russian President Putin meets with Turkish President Erdogan in Sochi
Photo: Reuters

In geopolitics and in finance, August 18 was a big day for Turkey. President Recep Tayyip Erdoğan made his first visit to Ukraine since the Russian invasion, meeting his counterpart Volodymyr Zelenskyy and United Nations secretary general António Guterres, partly to try to lay the ground for peace talks with Russia.

Meanwhile, back in Ankara, the Turkish central bank shocked international markets by cutting rates, even after inflation rose to almost 80% in July. Given the frequency of changes in leadership at the Turkish central bank, the rates decision might have been playing on Erdoğan’s mind as he met with Zelenskyy and Guterres in Lviv.

The cut is designed to prop up economic growth, a central concern for Erdoğan ahead of elections next year. But it will lead to even higher inflation, putting more pressure on the lira. It runs contrary to all conventional economic wisdom and, for many investors, further highlights the dangerous sway Erdoğan has over the central bank.

[The rate cut] runs contrary to all conventional economic wisdom and, for many investors, further highlights the dangerous sway Erdoğan has over the central bank

One Ankara source familiar with interest rate dynamics in Turkey notes that the precise details of the cut (100 basis points, to 13%) are less important than the signalling effect of cutting rates at all while inflation soars.

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