Turkey's central bank hikes interest rates sharply
June 22, 2023
Turkey's central bank delivered a large 6.5% interest rate rise on Thursday, boosting the rates it charges commercial lenders for borrowing money to 15% from 8.5%.
It's the first time Turkey has raised its rates since March 2021 — indeed the country had been raising eyebrows by cutting its rates even as inflation spiraled out of control as of late.
"Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved," the central bank said.
The bank also promised to "simplify and improve" policies that past governments under President Recep Tayyip Erdogan used to try and weather Turkey's worst economic crisis since the 1990s. Analysts anticipate that the rate is likely to reach a level around 25% by the end of the year — roughly where it was as recently as 2019.
The decision appears to indicate a return to more conventional economic policy, after Erdogan secured another term in office and then appointed two internationally respected former finance sector workers to the central bank and finance minister positions.
'Erdonomics' in the dustbin now Erdogan's re-elected?
Turkey's highly unorthodox fiscal policy of the last couple of years earned the nickname "Erdonomics" after President Erdogan.
The perceived economic wisdom is that increasing interest rates can help tame inflation — by discouraging people, businesses and banks from borrowing and spending.
But at the height of Turkey's inflation, which was more than 80% year-on-year for 2022, the central bank was repeatedly lowering its rates under pressure from Erdogan. If low rates could only spur growth, Erdogan believed, then inflation would somehow take care of itself.
He burned through three central bank bosses in four years as one by one they resisted his counterintuitive theory that promoting growth and printing money would somehow also stifle inflation. He also sacked the national statistics body chief, accusing the organization of exaggerating the scope of Turkey's financial difficulties.
New appointees were expected to restore normalcy
Erdogan appointed former Goldman Sachs director Hafize Gaye Erkan to the central bank role soon after narrowly winning re-election. And he made former Merryl Lynch banker Mehmet Simsek finance minister. Analysts had taken these appointments as an indication he would no longer be seeking to micromanage interest rate policy.
However, Erdogan has not conceded any failings, saying that he would "accept" the policy decisions of his new financial appointees but that he remained an "enemy" of high borrowing costs.
According to official figures, the worst of Turkey's inflation is now passed, with a rate of 39.5% last month, but independent research group ENAG argues the real figure is much higher, at around 108%.
The lira has also been losing value against the US dollar steadily, depleting the country's foreign exchange reserves and Turks' international purchasing power. It costs over four times more lira to buy a US dollar now than it did in 2018, the currency has lost around 20% of its value against the dollar just this year.
Much of Erdogan's domestic reputation rests on the economic growth during his roughly 20 years in power, either as prime minister or later president.
And any reprieve from pressure could prove short-lived for his new financial officials. Turkey faces more local elections in 2024, by which point Erdogan might again have a sharper focus on the ballot box than the national balance sheet.
Investors had already responded negatively to news of Erdogan's election victory and the likely implications for Turkey and the lira, rushing away from the currency following the election results at the end of May.
msh/rs (AFP, AP, dpa, Reuters)