Turkey’s Lira plunge persists

Following Turkish President Recep Tayyip Erdogan’s re-election, his government is embarking on a new economic policy direction. The appointments of Mehmet Simsek as the head of the finance and treasury ministry, and Hafize Gaye Erkan, a former Wall Street banker, as the central bank chief, indicate a departure from Erdogan’s unorthodox policies.

The primary focus of the new cabinet is to tackle the severe economic crisis gripping the country. Turkey is facing soaring inflation rates, a plunging lira, a cost-of-living crisis, and depleted foreign reserves. The government aims to address these challenges through a series of new policies.

One significant shift in policy came when Turkey’s central bank raised its key interest rate by 650 basis points to 15 percent, marking the first increase since early 2021. The central bank’s policy committee stated that this move would be strengthened further if necessary to achieve a significant improvement in the inflation outlook. It aims to establish a disinflationary trajectory, anchor inflation expectations, and control the deterioration in pricing behaviour.

This interest rate hike represents a reversal of Erdogan’s previous approach, which focused on monetary easing. The one-week repo rate had been gradually lowered from 19 percent to 8.5 percent in 2021. Turkey experienced annual inflation of nearly 40 percent last month, reaching a 24-year high of over 85 percent in October last year.

Despite the post-election tightening and measures taken to combat inflation, the lira still depreciated sharply to a new record low. The currency weakened by as much as 2.8 percent, trading at 25.2015 against the dollar. Erdogan’s re-election had initially raised hopes for economic stability, but the lira has continued its downward trend.

To address the economic crisis and curb inflation, the Turkish government is implementing additional measures. The Justice Minister, Yilmaz Tunc, revealed that they are working on extending a measure that limits annual rent increases to a maximum of 25 percent. This measure was introduced in June last year and is set to expire next month. Furthermore, the Labour Minister, Vedat Isikhan, announced a 34 percent increase in the country’s monthly minimum wage, raising it to 11,402 lira ($483).

As Turkey confronts these economic challenges, the government’s new policies aim to stabilise the situation, restore confidence, and promote sustainable growth in the long term.

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