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Residents waiting at a bus stop under a large Turkish flag in Istanbul, Turkey, on Sunday, April 30, 2023.
Bloomberg | Bloomberg | Getty Images
Turkey’s central bank jacked up the country’s key interest rate Thursday, almost doubling it from 8.5% to 15% as the new economic administration of recently re-elected President Recep Tayyip Erdogan embarked on a dramatic monetary policy U-turn.
The bank said that there will be further gradual monetary tightening until the inflation picture in the country improves.
The whopping 650-basis-point rate rise is the country’s first since March 2021, but was below analyst expectations of a 1,150-basis-point hike to 20%.
“The Committee decided to begin the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior,” the central bank, led by newly-appointed Governor Hafize Gaye Erkan, said in a statement.
Some analysts criticized the central bank’s move as not going far enough, however.
“Ouch — disappointing. Not enough,” Timothy Ash, emerging markets strategist at BlueBay Asset Management, wrote in an note via email. “They needed to front load hikes. Market won’t like that.”
The lira weakened to around 24.1 against the dollar following the news, from 23.54 before the decision was announced — a record low, according to Reuters data.
U-turn
Turkey steadily lowered its policy rate from 19% in late 2021 to 8.5% in March as inflation ballooned, breaching 80% in late 2022 and easing to just under 40% in May. Traditional economic orthodoxy holds that rates must be raised to cool inflation, but Erdogan, a self-declared “enemy” of interest rates who calls the tool “the mother of all evil,” vocally espoused a strategy of lowering rates instead.
The result was a cost-of-living crisis for Turks as the country’s currency, the lira, plummeted. It’s lost some 80% of its value against the dollar in the last five years, and Turkey has found itself precariously low on foreign currency reserves as it sold FX to prop up the lira.
“Erdogan has accepted that short-term pain is necessary to redress the economy, and that appearing to empower Simsek will play well with markets,” George Dyson, a senior analyst at consultancy Control Risks, told CNBC about the decision.
“The question will be how long Erdogan will tolerate that pain for, and if and when societal pressure get too much and he wrests back control from Simsek,” he said. “The temptation will be ever present for Erdogan to intervene once again.”
In mid-June, Erdogan said his opposition to raising rates was unchanged, but said he would abide by Simsek’s decisions in order to bring down inflation.
“Some of our friends should not be mistaken, such as (asking), ‘Is our president going for a serious change in interest rate policies?'” he told reporters at the time. “But upon the thinking of our treasury and finance minister,” Erdogan added, “we have accepted that he will take steps swiftly, comfortably with the central bank.”
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