2023-06-22 12:40:52
Turkey’s central bank raised its key rate to 15% on Thursday in a major policy reversal, abandoning for the first time in two years the unconventional economic measures promoted by Turkish President Recep Tayyip Erdogan.
The bank thus raised its key rate from 8.5% to 15% during its first monetary policy meeting since the re-election of the Turkish head of state in May.
The decision is aimed at “monetary tightening in order to establish the course of disinflation as soon as possible”, the central bank said in a press release.
“Monetary tightening will be increased as much as necessary, in a timely and gradual manner until a significant improvement in the outlook for inflation is achieved,” she added, hinting that the rise in rates might continue in the coming months.
Mr. Erdogan said last week that his conviction on the need to lower rates remained “unchanged”. He nevertheless hinted that he had agreed to a rate hike.
Prior to the decision, Fitch Ratings had announced plans for a rate hike of up to 25% by the end of the year.
The 15% rate hike remains below market expectations, say observers.
The Turkish lira fell 2.5% once morest the dollar on Thursday followingnoon, showing investors’ disappointment with the central bank’s decision to opt for a gradual approach instead of a big hike.
“Not enough. They should have gone up all of a sudden,” said economist Timothy Ash of BlueBay Asset Management.
“Further hikes are needed in upcoming meetings to tackle Turkey’s inflation problem,” added Liam Peach, emerging markets analyst at Capital Economics.
Contrary to conventional economic theories, Mr. Erdogan, re-elected at the end of May for a third term, believes that high interest rates promote inflation.
Over the past two years, he has forced Turkey’s central bank to cut rates as part of a “new economic model” that prioritizes growth and job creation.
But this choice contributed to the surge in inflation – which in May fell below 40% for the first time in sixteen months, according to official figures – as well as to the fall of the Turkish lira which lost more than 80% of its value once morest the dollar in five years.
Independent economists dispute the official rate of inflation and estimate it at more than 100%.
They also criticize Turkey’s central bank for spending nearly $30 billion to prop up the national currency between Jan. 1 and the presidential election, pushing its foreign exchange reserves into negative territory for the first time since 2002.
“Rational Measures”
The Head of State has given signs of a possible return to more conventional policies since his re-election, in particular by appointing a former economist from the American bank Merrill Lynch, Mehmet Simsek, to the Ministry of the Economy, and a former Wall Street executive Hafize Gaye Erkan, head of the central bank.
When he took office, Mr. Simsek, already Minister of the Economy (2009-2015) then Deputy Prime Minister in charge of the Economy (until 2018), warned that it would be necessary to return to “measures rational” to revive the Turkish economy.
Mr. Erdogan has several times in the past invoked the precepts of Islam, which prohibits usury, and claims that high interest rates are promoted by a foreign “lobby”. However, he said last Wednesday that he “accepted” that his new team might take measures that contradict his convictions.
Mr. Simsek and new Vice President Cevdet Yilmaz flew to Abu Dhabi on Thursday to mobilize new investments and loans. The appointment of Mr. Simsek and Ms. Erkan had been applauded by the markets.
But observers fear that the field of action of the new team will be restricted in the short term by the Turkish president who has already waltzed off several ministers and governors of the central bank when they contradicted his decisions.
“The magnitude of the rate hike was less than the average market expectation of a 17-20% increase,” said Hamish Kinnear, an analyst at risk consultancy Verisk Maplecroft.
“It’s a sign that the new governor is trying to exercise caution to avoid a confrontation with President Erdogan.”
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