Turkey’s Central Bank announced it raised its primary interest rate by a modest 250 basis points to 17.5%, falling short of market expectations which forecasted a 500 basis point increase. The bank aims to combat rampant inflation, which has reached double-digits and sent the economy into turmoil.
The announcement was made on Thursday, against market concerns about the government’s inadequate measures to rectify inflation. Also, this timid increment caused a half-percentage point decline in the value of the Turkish lira against the dollar, solidifying the 30% depreciation it has faced this year. The Turkish currency had earlier hit a record low of 26.9 against the dollar, suggesting a lack of confidence in the market’s expectation of the rate hike.
Rebuilding trust amid market skepticism
The rather conservative approach by the Central Bank was the second consecutive hike under the new economic leadership. The team, led by Central Bank Governor Hafize Gaye Erkan and Finance Minister Mehmet Simsek, is striving to shift away from the unconventional policies championed by Turkish President Recep Tayyip Erdogan. Erdogan, known for his aversion to interest rates, insisted on lowering rates despite the high inflation, a move that stands contrary to the norms followed by central banks worldwide.
Despite recent significant trade and investment agreements with Gulf countries like the United Arab Emirates and Saudi Arabia potentially bolstering the Turkish economy, market experts like Timothy Ash, an emerging markets strategist at BlueBay Asset Management, are wary of the new economic team’s commitment. He emphasizes that trust in the Central Bank of the Republic of Turkey (CBRT) is low, and significant actions are required to rebuild it.
Even though the country’s economic trajectory has received a potential boost from the recent multi-billion-dollar investment pledges from the Gulf countries, skepticism looms. Critics argue that these investment deals, while promising, may not bring immediate relief, and cannot guarantee macroeconomic stability without substantial tightening of monetary policy.
In the aftermath of the rate hike announcement, Liam Peach, a senior emerging markets economist at London-based Capital Economics, warned that if the monetary tightening continues to underwhelm, the lira would likely bear the brunt, potentially experiencing another 10% fall by year-end.
Erdogan’s recent diplomatic overtures to the West and a move towards more conventional economic management may yield increased Western investment in Turkey. However, the lack of aggressive action to curtail inflation, coupled with a range of complex banking regulations, continues to cast a shadow on the Turkish economy. As Cagri Kutman, Turkish market specialist at KNG Securities, puts it: “They need to do something to break this vicious cycle.”
