Turkey’s apex bank raises rates

Turkey’s central bank has implemented a significant interest rate hike in an effort to combat soaring inflation and adopt more conventional economic policies. The key rate was raised by 6.5 percentage points, reaching 15%, which is lower than market expectations but marks a departure from President Recep Tayyip Erdogan’s unconventional approach to inflation. This move follows the recent appointments of internationally respected officials to lead the central bank and finance ministry. Traditional economic theory advocates for raising interest rates to tackle inflation, a strategy employed by central banks globally amid the post-pandemic rebound and geopolitical tensions.

President Erdogan, who has been critical of high borrowing costs, has indicated acceptance of the new finance minister’s policies while maintaining that his own views remain unchanged. This raised concerns about the central bank’s independence. However, the Monetary Policy Committee stated that it initiated the monetary tightening process to establish a disinflationary trajectory promptly. The committee expressed its commitment to further strengthening monetary tightening until a significant improvement in the inflation outlook is achieved.

Economists view this rate hike as a return to more orthodox monetary policymaking, albeit at a lower level than anticipated. The move is seen as an attempt to strike a balance and avoid a clash with President Erdogan. Critics argue that Erdogan’s unconventional approach exacerbated economic turmoil, resulting in currency depreciation, rising living costs, and hardships for households. The central bank’s foreign currency reserves have also been depleted in its efforts to stabilise the Turkish lira. The recent rate hike caused a 3% weakening of the lira against the dollar.

President Erdogan, who was reelected for a third term, has appointed Mehmet Simsek as the economy’s head, signalling a shift toward more pragmatic policies. Simsek emphasised the need to return to rational grounds. Furthermore, Hafize Gaye Erkan became Turkey’s first female central bank governor, highlighting the move towards pragmatic decision-making. Experts believe that Erdogan may temporarily relinquish economic policymaking power to attract foreign investment. However, concerns remain about the government’s ability to adhere to preferred policies as local elections approach in March. The government’s recent increase in the minimum wage by 34% has been criticised as an attempt to mitigate the impact of inflation on households ahead of the upcoming vote.

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