Country Report Turkey January 2011

Economic performance: The lira and share prices weaken from November

After a period of steady appreciation, the lira softened in nominal terms against major currencies in late November and December, amid growing domestic debate on the need to control capital inflows. As of December 17th, following the Central Bank's decision to cut its benchmark interest rate, the lira traded at about TL1.54:US$1, compared with a strong point of TL1.39:US$1 on November 4th. The lira also weakened against the euro, reaching TL2.04:EUR1 on December 17th compared with TL1.94-1.98:EUR1 during November.

However, the Central Bank's trade-weighted real effective exchange rate index shows that the lira in real terms-that is, its value after allowing for both nominal exchange-rate fluctuations and inflation differentials-appreciated sharply in 2010. The index stood at 130.5 in November, just above the peak reached at the beginning of 2008 before the global financial crisis caused the lira to weaken.

The main Istanbul Stock Exchange (ISE) index, which closed at an all-time high of 71,543 points on November 9th at the end of a strong rally, was on a general downward trend in late-November-December. On December 17th, the index closed at 63, 524 points. The prices of bank shares were especially hard hit by the actions of the Central Bank, which are expected to erode their profits.

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