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Nope, Thanksgiving ain’t for another five months, but yes, that is Turkey you smell cooking in the kitchen. Turkey the country that is!

According to recent news reports, Turkey’s first quarter gross domestic product (GDP) soared to record high levels, coming in at a whopping 11%. Initial forecasts were for a growth rate of 9.7%, which would have already been a great improvement from the impressive 8.9% growth in 2010.
To put things into perspective, the 11% growth rate even surpasses that of mighty China! Now that’s what I call waxing hot!

Digging deeper, it appears that the backbone of the growth in GDP has been consumer spending. The trade deficit now stands at 10.1 billion USD, indicating strong domestic demand for imported products. Banks have done their part as well, as consumer loans have risen 36% year-on-year.

But of course, if you leave something cooking for too long, it will end up getting burnt and I fear that this may be the case for Turkey.

Double digit growth rates are hardly sustainable and what more in a world where the global economy is still struggling. In addition, while domestic demand is strong, we have to remember that it is also getting a boost thanks to a very lax credit market.

Doesn’t this sound familiar? Anybody remember the Great Recession of 2008? Oh wait that’s right, you’re all brainwashed by Apple to forget that ever happened. I kid, I kid!

In order to limit some of the risks that Turkey is exposing itself to, I feel that the Central Bank of the Republic of Turkey (CBRT) should begin raising interest rates. I fear that the excess liquidity could widen the trade deficit or trigger a run of hyperinflation, which would be disastrous for the country in the long run.

But Turkey’s central bank doesn’t think so. Two weeks ago, the central bank chose to leave interest rates unchanged at 6.25%, much to the dismay of many investors.

The bank said in its statement that there was absolutely zero evidence that the economy was overheating. Additionally, the bank indicated that it was actually weak external demand that has been causing the country’s trade deficit to rise.

It also emphasized that new banking regulations would taper down loan growth. Besides, raising rates could lead to a stronger currency and hurt Turkey’s export industry even more.

The central bank isn’t just ignoring the market though. To alleviate the worries of investor, it has chosen to target the country’s Reserve Requirement Ratio (RRR) (similar to what the People’s Bank of China is doing) to indirectly “cool” the country’s seemingly unsustainable growth rate. The RRR currently stands at 16%, a huge leap from the 6% RRR in December.

Let’s get real though. How long can RRR cap inflation? If Turkey continues to grow at a rapid pace, then it won’t be long until the hand of Turkey’s central bank is forced to act. Before we know it, we could see rate hike after rate hike after rate hike!

Now, now, I know what you’re thinking… “What the heck does Turkey have to do with my forex trading?”

Well, if you’re a fan of long-term time frames and trading exotic currencies, the Turkish Lira (TRL) could be a good trade candidate!

USD/TRL 4-hour chart