- Turkey Raises Interest Rates to Combat Inflation
- Economic Shift: Reversal of Erdogan’s Low-Interest Rate Policy
- Gradual Tightening: Starting the Process of Monetary Policy Adjustment
Turkey has increased its benchmark interest rate from 8.5% to 15%, reversing one of President Recep Tayyip Erdogan’s unconventional economic policies.
The 6.5-point increase was significantly less than what economists had anticipated, but it marked a significant policy shift by his newly assembled economic team to combat rampant inflation.
The leader of Turkey has previously insisted on maintaining interest rates low.
The inflation rate in Turkey is nearly 40 percent, and the country is in the midst of a cost-of-living crisis.
Hafize Gaye Erkan, 44, was recruited from the United States only this month, following Mr. Erdogan’s re-election to the presidency.
Her decision signifies the first increase in interest rates since December 2020, following a tumultuous period in which three central bank governors were dismissed in less than two years for adhering to conventional economics.
Although the increase nearly doubles Turkey’s policy rate to 15%, it is significantly less than the majority of economists predicted.
Morgan Stanley, an investment bank situated in the United States, predicted a 20% increase, while Goldman Sachs predicted a 40% increase.
In its statement, the bank’s monetary policy committee made it plain that Thursday’s action was the beginning of a gradual process aimed at reducing inflation to 5%.
Its members stated that they had “decided to begin the process of monetary tightening to establish the disinflation course as quickly as possible… and to control the deterioration in pricing behavior.”
The problem for President Erdogan is that Turkey’s inflation rate remains stubbornly high and its central bank’s reserves have plummeted to dangerously low levels, despite spending billions of dollars to shore up the lira.
In recent months, interest rates have decreased from 19% two years ago to 8.5%, and this change in direction will have repercussions for a country that is already experiencing an economic crisis.
It’s a risk, but a difficult circle to square,” says Ozge Zihnioglu, a senior lecturer in politics at the University of Liverpool.
Erdogan “must do something for the economy,” but “a clear shift to orthodox economic policies would impact a significant portion of society, and he wouldn’t want that impact on local elections” next year.
During President Erdogan’s first years in office, the Turkish economy grew dramatically. In recent years, however, he has abandoned conventional economic wisdom by attributing high inflation to high borrowing costs and seeking to stimulate economic expansion.
The Turkish currency has lost more than 80 percent of its value over the past five years, and foreign investment has plummeted. Turks are attempting to withdraw foreign currency from domestic institutions.
Mehmet Kerem Coban of Kadir Has University stated that Turkey’s economic paradigm required capital because its reserves had dwindled.
Although the increase in interest rates was intended to stabilize the Turkish lira, investors were unimpressed, and the currency continued to decline against the dollar.
Mr. Erdogan has been in authority for over twenty years in Turkey. Last month, he defeated his opposition opponent in elections that international observers deemed “unfair” because they gave the incumbent president an unjustified advantage.
During the election campaign, he reiterated that interest rates would remain low as long as he was in office, guaranteeing that economic policy would not change. The opposition pledged to shift its emphasis away from low-interest rates.
However, he signified a change just days after his re-election.
First, he appointed Mehmet Simsek, a former financier, and economist, as finance minister. Despite being a former member of Erdogan’s cabinet, Mr. Simsek has made it plain that Turkey’s only economic option is to return to “rational ground” and “compliance with international standards.”
Next, he appointed Hafize Gaye Erkan as the first female governor of the central bank. She is a well-known figure on Wall Street but has never held a position in Turkey. She was previously the chief executive officer of the bank First Republic, which she left roughly a year before it failed.
Mr. Erdogan stated last week that his stance on interest rates had not changed, but “we agreed that [Mr. Simsek] should take the necessary steps with the central bank swiftly and without difficulty.”
Emerging markets expert Timothy Ash warned before the decision that if Ms. Erkan did not “front-load rate hikes,” she would risk “constantly playing catch-up with the market and waiting in the anteroom of the presidential palace to beg for rate hikes.”
Bartosz Sawicki, an analyst at Conotoxia fintech, stated that Turkish households would experience a precipitous increase in loan payments and a more conservative fiscal policy in the short term, but there was no other way to “put out the inflationary fire in two to three years.”
