Türkiye – interest rates. Central bank decision – June 2023

At its first meeting chaired by new chief Hafize Gaye Erkan, Turkey’s central bank reversed course after years of accommodating monetary policy, with the one-week repo rate dropping to 8.5 percent from 19 percent in 2021, despite rising inflation – indicated the Reuters agency.

According to analysts, the rise in the main interest rate to 15 percent suggests that Erkan may have limited ability to aggressively fight inflation under Erdogan. The median estimate in the Reuters poll pointed to an increase in the rate to 21 percent.

Thirty minutes after the raise – the first century Turkey from the beginning of 2021 – the lira suddenly began to weaken, reaching an all-time low of around 24.60 against the dollar, Reuters reported.

The central bank said the tightening would “continue as much as necessary, in due course and gradually, until a significant improvement in the inflation outlook is achieved,” the agency said.

Hitting a more hawkish tone than a month earlier, the bank said it had raised rates “in order to achieve a disinflation rate as soon as possible, anchor inflation expectations and have more control over price reductions.”

Inflation in Turkey was just under 40 percent year-on-year in May, before hitting a 24-year high of over 85 percent last October, Reuters reported.

He added that a high-ranking Turkish official said it had been decided an increase in interest ratesto partially avoid excessive market volatility. The official explained that the increase in interest rates is also to show determination to tighten policy and such decisive steps will be continued in the future.

Erdogan has been calling for interest rate cuts over the last two years, which triggered a currency crisis in late 2021 and pushed prices up. The lira fell 44%. in 2021 and 30 percent. last year, despite the central bank’s efforts to counter demand in the forex market by using its foreign exchange reserves, Reuters reported.

Following his election victory last month, Erdogan signaled he was ready to backtrack on his economic policies. He also appointed the highly regarded Mehmet Simsek as finance minister, and Erkan, a former Wall Street banker, as head of the central bank.

Erdogan said last week that he had approved steps to be taken, suggesting he had given the go-ahead for interest rate hikes, Reuters reported.

The political decision may indicate that “Erkan has limited room for maneuver in restoring a more orthodox monetary policy,” said Piotr Matys, senior currency analyst at InTouch Capital Markets, quoted by Reuters.

He added: “It can be argued that it will take time to restore broken trust. And it would be more effective to exceed expectations, especially if Erkan wants to convince investors that he is in charge of monetary policy, not President Erdogan.

Most economists in a Reuters poll expected further interest rate hikes this year, with a median year-end forecast of 30 percent. The central bank’s key interest rate remains below deposit rates, which are as high as 40%, and real interest rates (rates minus inflation) are still deeply negative.

Some analysts have expressed doubts about Erdogan’s commitment to abandoning his earlier policies. In turn, the authorities hope that foreign investors will return, as well as hard currency, Reuters reported.