The Turkish Central Bank raises the interest rate to 15%, much less than expected

2023-06-22 11:19:42

For the first time in more than two years, the Turkish Central Bank raised, on Thursday, interest rates by 650 basis points to reach 15 percent, which is much lower than expectations of 20 percent, but it is a step that reflects a major shift in Turkey’s policy following appointing a new economic team with the beginning of the crisis. The new mandate of President Recep Tayyip Erdogan.

For more than two years, Erdogan has been insisting on reducing interest rates despite the significant rise in inflation, following a policy described as unconventional and contrary to what is usually followed by raising interest rates in order to curb the price increase.

After winning a third presidential term at the end of last May, Erdogan appointed Mehmet Simsek, a former economist at Merrill Lynch, as Minister of Finance, and the former financial official on Wall Street, Hafiza Ghaya, ruler of the Central Bank.

The markets considered the appointment of the new economic team in Erdogan’s government as a sign of a shift in Turkey’s policy towards traditional economic policies that would support the local currency, restore foreign investments and limit price increases.

Attention was also awaiting the meeting of the Turkish Central Bank today, as it is the first test of the independence of its decision under the presidency of the new governor of the bank, Hafiza Arkan.

The Turkish Central Bank confirmed that the process of raising interest rates will be gradual, which is consistent with the expectations of international investment banks for a further increase in interest rates this year.

Following the decision of the Turkish Central Bank, the Turkish lira fell by more than 2.5 percent to a new record high, as the interest rate increase was much lower than expectations.

Turkey’s loose monetary policies led to a significant jump in the inflation rate, which exceeded 85 percent in October last year, at the highest level in nearly a quarter of a century, before it began to fall below 40 percent in May for the first time in 16 months.

The Turkish lira fell to historic lows, and the pace of this decline increased following the election of President Erdogan last month, with the authorities easing their grip on the currency.

After years of exodus of foreign investors, the Turkish government hopes the move towards free market policies and regulations will attract investment and money flows.

Net foreign exchange reserves at the central bank fell to a record $5.7 billion last month before rising this month, reflecting how costly efforts to stabilize the lira have been.

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