So turkey does a mini Indonesia circa 1997 and jacks up their lending rates overnight from 7.5 to 12%...Though it temporarily corrected the fall in Lira/USD...I feel their economy cant take this sudden surge and not to mention sustain a 12% lending rates... Traders out here...Im only a student but want to understand the thought process of currency analysts here in how you feel the situation would pan out....
1) Do you think this quick jack up of domestic rates will help arrest the currency rate fall.
2) How exactly will a sudden rate increase led to deflationary environment?
3) Does Turkey expect increasing rates will attract inflow into lira thereby increasing its demand.
Some Econ 101 queries here, but as I have been told before, in the end its your mastery in this which really differentiates the good from great traders....
It's complicated... I would say that the hikes are, in this case, rather futile and might actually end up counterproductive.
Specific answers to your questions (all are solely my opinions): 1) Not really, as Turkey has some serious political issues. I don't believe that their ccy is a target for speculative attacks, which the hikes would discourage. 2) Hikes could cause the economy to slow, which could, eventually, lead to disinflation. 3) No, the point is primarily to discourage speculative shorts.
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