U.S. Federal Reserve hiked interest rates for the third time this year by a quarter point, from 1.25 percent to 1.5 percent. It also signaled that there would be three more hikes in 2018. The next day, Turkey's central bank raised its lending rate by half a percentage point, and the lira immediately dropped sharply. These events reveal just how vulnerable Turkey will be to U.S. monetary policy going into next year.
Turkey relies on "hot money" to keep paying for government employees and to turn around high dollar-denominated debt exposure. So when the Fed raised its rates, Turkey needed to as well, but it's also hesitant to raise rates for fear of the economic slowdown and rising unemployment it might cause.
Yesterday Turkish Central Bank did not raise rates enough to satisfy the markets, causing the lira to fall precipitously, which will add to inflation in coming year.
According to the international community, the dollar would rise substantially next year. Then the economic pain we expected in 2017 might yet arrive in 2018.
