Taksim Square, Turkey, with the statue of first president Kemal Ataturk and the Turkish flag in the background.
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this turkish lira Turkey’s central bank raised its benchmark interest rate by 650 basis points, a dramatic reversal in monetary policy, causing the central bank’s monetary policy to fall to a record low.
On Thursday, the central bank nearly doubled its key interest rate to 15% from 8.5%, the country’s first hike since March 2021. However, that was still below Reuters expectations for a rate hike to 21%.
The lira has extended its decline since President Recep Tayyip Erdogan was re-elected and was last trading at 24.97 per dollar.
“(The lira) is falling sharply and will probably continue to fall as they try to catch up,” said Steve Hanke, a professor of applied economics at Johns Hopkins University, adding that the central bank’s decision was “a bit behind.” curve. “
Newly appointed Governor Hafiz Gay Erkan signaled further interest rate hikes until the country’s inflation situation improves.
“Monetary tightening will be further tightened in a timely and gradual manner as needed until the inflation outlook improves significantly,” Elkann said. said in a statement Thursday.
According to government statistics, the country’s annual inflation rate in May was 39.59%. In October last year, Türkiye’s inflation rate soared to 85.51%.
Turkish Finance Minister Mehmet Simsek explain Predictable fiscal policy and a free exchange rate regime will “ensure the Turkish lira returns to stability and becomes a reliable currency”.
However, Hanke said that alone is not enough.
“Monetary policy is not about interest rates, but about the growth and quantity of money,” the professor said, adding that Turkey’s money supply “is growing too fast” given its year-on-year growth rate. The money supply is about 50% per year.
Goldman Sachs said the rate hike signaled that, at least in the short term, the central bank “intends to stick to an unorthodox framework centered on macroprudential measures and quantitative restraints, rather than tightening policy based on accessing TCMB liquidity on interest rates.”
However, analysts warned that without an interest rate-based monetary policy stance, efforts to focus on these measures to stabilize and increase the resilience of Turkey’s financial system will be limited.
The lira’s plunge came three days earlier than investment banks’ three-month forecasts.