The Turkish Economy - Recent Developments (1)

The fragility of the economy to external shocks was tested in May 2006, when a turmoil in the global financial markets caused local interest rates to rise from 13 percent to 23 percent coupled with 30 percent devaluation in Turkish Lira. The Central Bank responded with a 425 basis point interest hike. After a brief spike to double digits, inflation has returned to pre-May levels at 9 percent. The Lira has recovered most of its previous loses towards the end of the year. Yields on short term treasury, however, remain high and real interest rates, 12 percent at the start of 2007, are still 600 basis points above pre-May levels.