The turning of Türkiye's monetary policy releases a clearer signal, and once again significantly increases interest rates by 750 basis points to curb inflation | significantly increases interest rates | Türkiye

Release time:Apr 15, 2024 12:46 PM

The Central Bank of Türkiye announced on the 24th that it would raise the benchmark interest rate by 750 basis points from 17.5% to 25%, which was much higher than expected. According to the analysis, this shows the determination of Türkiye's central bank to curb inflation, and also releases a clear signal that Türkiye is returning to more traditional economic policies.

Accumulated interest rate hike of 1650 basis points

It is reported that Türkiye's central bank decided to raise interest rates by 750 basis points on the 24th. This is the third consecutive interest rate hike by the Central Bank of Türkiye since it returned to the interest rate hike cycle in June, and it is also the largest interest rate hike in the cycle. Since June, Türkiye's central bank has raised interest rates by 1650 basis points.

The rate hike this time is also higher than most analysts predict, that is, the central bank will raise the benchmark interest rate to 20%. Previously, analysts generally believed that the benchmark interest rate was not expected to rise to 25% by the end of the year.

The Bank of Türkiye issued a statement on the same day, saying that recent indicators showed that Türkiye's inflation trend continued to strengthen, and the Monetary Policy Committee decided to continue to implement the monetary tightening policy. The medium-term goal of the central bank's monetary policy is to reduce the inflation rate to 5%, and the monetary tightening policy will be strengthened in a timely and gradual manner as needed, until there is a significant change in inflation expectations.

Türkiye's President Recep Tayyip Erdogan also said in his nationally televised speech that he was taking resolute measures to solve the problem caused by inflation. Türkiye's Finance Minister Simshek also wrote on social media: "We have made up our mind. Stabilizing prices is our top priority."

Since 2022, Türkiye's inflation has been "high fever", and even soared to 85.51% in October 2022, the highest in 24 years. Türkiye's inflation rate fell to 39.6% in May and 38.21% in June this year, but it rebounded to 47.83% again in July, ending eight consecutive months of decline.

In addition, over the past three years, the Türkiye lira has depreciated by about 68% against the US dollar. High inflation and sharp devaluation of the local currency have led to a decline in people's purchasing power and living standards, which has a great negative impact on Türkiye's economic development. After the announcement of the central bank's statement on interest rate increase, the Türkiye lira rose rapidly against the US dollar.

Determined to break the "unorthodox" monetary policy

According to public opinion, Türkiye's central bank raised interest rates again in August, which was more than expected, sending the clearest signal so far, indicating that Türkiye's new economic team has resolved to break the "unorthodox" policy for many years and strive to curb runaway inflation.

Since Türkiye's President Recep Tayyip Erdogan won the most difficult election in 20 years and was re elected in May this year, the country's economic policy has undergone tremendous changes, and the economic team has also undergone a "big change of blood".

In August 2018, Türkiye fell into a currency crisis and the lira's exchange rate plummeted against the US dollar due to the US's increase in import tariffs on Türkiye's steel and aluminum products. Since then, Türkiye's inflation has been rising due to the epidemic and the Russia-Ukraine conflict. Generally speaking, the conventional method for central banks around the world to combat inflation is to raise interest rates, but Erdogan opposes high interest rates and even states that high interest rates are the reason for high inflation.

In order to implement non-traditional economic policies, Erdogan has repeatedly replaced the central bank governor. From September 2021 to February 2023, the People's Bank of Turkey went against the trend by repeatedly lowering interest rates to increase exports and boost consumption, lowering the benchmark interest rate from 19% to 8.5%.

However, after winning re-election in May this year, Erdogan signaled a shift in economic policy. He first invited Finance Minister Himsek, who resigned in 2018, back to his post. After assuming the post of Finance Minister, Shymshek promised that Türkiye would return to "rational" economic policies.

Since then, Erdogan appointed Erkan as the governor of Türkiye's central bank in June. Elkan has long served as an executive in the US financial industry, and is also the first female central bank governor in Türkiye. She advocates raising interest rates to curb inflation and alleviate the depreciation trend of the lira.

Or change the game rules

As for the third sharp interest rate increase by the Turkish Central Bank, Liam Piqi, an analyst at Keyvia Macro, believes that the rate increase by the Turkish Central Bank far beyond expectations will greatly help reassure investors and make them believe that the process of returning to orthodox policies is on the right track. "In terms of Türkiye's macroeconomic prospects, this may change the rules of the game."

Grzegor Droz, an analyst at Conotoxia, an investment institution, also believes that this marks another step forward for Türkiye's central bank to abandon the extremely loose monetary policy and save the Türkiye lira. However, he also pointed out that the changes brought about by interest rate hikes often have a delayed effect. It is expected that inflationary pressure will continue to exist in the future, but the weakening of the lira will come to an end.

Elkan previously predicted that, with the rise of oil prices and the deterioration of inflation expectations, Türkiye's inflation rate is expected to reach a high point of 58% by the end of this year, and the inflation rate will begin to decline gradually from 2024.

However, analysts still have different views on the next direction of Türkiye's monetary policy. Picci stated that based on the fact that several previous central bank governors have been replaced, it cannot be ruled out that Erkan may be dismissed due to this significant interest rate hike.

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