The Turkish government raised interest rates in the first time since the year 2021, and promised to return a “free exchange regime”. This is because the new economic leadership has decided to abandon policies that sent inflation skyrocketing and investors running.
The lira, which hit a new record low of 24.5 against the dollar after the decision, fell below expectations for more aggressive action.
On Thursday, the central bank under newly appointed governor Hafize Gae Erkan raised its benchmark rate for one-week repo to 15% from 8.5 percent.
Business executives in the local market and international investment banks hoped that borrowing costs would increase to around 20%.
Enver Erkan is the chief economist of Dinamik Yatirim Menkul Degerler, a brokerage based in Istanbul.
Since the May presidential election in which Erdogan was elected, central bankers have bet on a change of stance away from the low rate policies that President Recep T. Erdogan has pushed.
The president appointed Mehmet Simsek as Finance Minister, an investor-friendly ex-deputy prime minister. Erkan, who was a Goldman Sachs executive before, has been named as the central bank’s chief.
Simsek stated after the rate decision on Thursday that Turkey’s policies will focus on “sustainable growth” achieved through “rule based” monetary policies and fiscal policies. Simsek said that a “free exchange regime” was essential to bring back investors who had fled Turkey in recent years.
This year, the country spent at least 24 billion dollars to defend its currency by using state-owned banks and other measures that discourage businesses and consumers from trading and holding foreign currency. According to many economists, the Turkish economy has overheated as a result a prolonged period of low interest rate and an onslaught of government giveaways in advance of last month’s elections.
The rate-setters have hinted that borrowing costs will continue to rise in the months ahead, stating they would tighten the policy “as needed and in a timely manner” until an improvement in inflation expectations is seen.
Hakan Kara, the former chief economist of the central bank, said that Thursday’s announcement “signalled the authorities priority will be on growth in the short term rather than deflation”. He said that although the central banks had promised to tighten policies as much as necessary, “we’re in a time where actions speak louder” than words.
Central bank hopes to calm a cost-of-living crisis. Inflation is at almost 40%. Erdogan’s policies, which are aimed at reducing borrowing costs and lowering the cost of living, have sent the Turkish lira into a tailspin, as well as causing serious imbalances in the $900 billion economy.
Investors warn that while Erdogan’s Thursday move was a change towards more conventional policy, he has already been on this path in the past, only to reverse course. In early 2021, the former central bank governor Naci AGAL was fired after increasing borrowing costs.
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