The Turkish Central Bank Monetary Policy Committee announced that the benchmark interest rate has raised 650 basis points to 15%. This is the first time that Turkey has raised the benchmark interest rate since March 2021. The industry believes that this is a strong signal that Turkey is turning to orthodox economic policy to cope with high inflation.
After the success of Turkish President Erdogan at the end of last month, he successively appointed the new economic minister and the governor of the central bank. Analysis generally believes that the new government will implement a more tightened monetary policy.
At present, Turkey ’s inflation level exceeds 40%, which is more than 85%last year, the highest in 24 years.Traditionally, the common method of fighting inflation is to raise interest rates, but Erdogan opposed high interest rates for a long time, and even said that high interest rates are the cause of high inflation.From September 2021 to May this year, Turkey's benchmark interest rate dropped from 19%to 8.5%.It is worth noting that almost every interest cutting has led to further decline in lira.In the past three years, the Turkish li La depreciated 67%of the US dollar.
Erdogan said last week that he accepted the idea of changing the new economic team.But he added that his views on economics have not changed.Many analysts predict that in order to fight against high inflation, Turkey may continue to raise interest rates in the next few months.
Once the news of interest rate hikes was announced, the Turkish exchange rate staged a big collapse. The Turkish lira plummeted more than 5%against the US dollar in a single day, a historical low. In the past five years, the cumulative decline in the dollar against the US dollar in the past 5 years was as high as 80%.
Some analysts believe that because the interest rate hike may be lower than the market expectations, Licham has fallen further.
It is worth noting that the Turkish Central Bank Monetary Policy Committee issued a statement saying that in the future, the central bank will strengthen currency tightening in a timely and progressive manner until the inflation prospects have improved significantly.
Another analyst believes that the process of Turkey's return to the orthodox economic policy is getting closer, and it is expected that the country may continue to raise interest rates within the year.Some people support the current cautious operation of the Turkish central bank, because radical interest rate hikes may cause too fast economic slowdown and accidentally trigger a debt crisis.
It is also believed that the cautious interest rate hikes of the New Central Bank of Turkey are to avoid conflicts with Erdogan.
