The Central Bank of Turkey hiked by 500bps to 30% at its September meeting. It has been raised by 22.5% since May. The lira was weaker in response and has been selling off throughout the hiking campaign. Turkey remains in the clutches of a currency crisis after President Erdogan destroyed its credibility. The central bank said it was prepared to take further aggressive action on interest rates, with the CPI annual rate 59% in August.
“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” the central bank said on Thursday.
We now have President Tayyip Erdogan is trying to retore policy credibility fresh from his re-election. Recall since September 2021 there had been concerted pressure from President Recep Tayyip Erdogan wanting rates cut to stimulate the economy, despite a collapsed Lira and soaring inflation. The market does not forget and play along with the Turkish mess.
The TCMB prior to the earthquake had signaled it will end the rate-cutting cycle. Turkey’s currency, the lira remained soft near a record low, with one U.S. dollar buying 18.80 lira after the announcement. This is the fourth meeting since Erdogan won a third term in a runoff election May 28 and reappointed Mehmet Simsek to the helm of the economy. The former Merrill Lynch banker had previously served as Erdogan’s finance minister and as a deputy prime minister until 2018.
Erdogan also appointed Hafize Gaye Erkan in June as Turkey’s first female central bank governor. A former co-chief executive of the now-failed San Francisco-based First Republic Bank, Erkan replaced Sahap Kavcioglu, who oversaw a series of rate cuts.
The decision comes after 1050bps in unorthodox rate cuts since September of 2021
Turks can’t afford bare necessities as inflation runs rampant from the collapsed currency.
The central bank said the effects of tax increases and a 23 per cent depreciation in the lira against the US dollar since June “have broadly passed through to prices, and that the underlying trend in monthly inflation is on course to decline”. In June, the government increased the minimum wage by 34% to try and stave off protests..
“We will take decisive steps in the fight against inflation,” Erdogan said at the time. “We will increase our efforts to protect large sections of our people from the effects of inflation.”
The impacts of higher borrowing costs have yet to fully filter through to Turkey’s economy mainly because of the lingering effects of massive stimulus measures, such as the minimum wage rise and a month of free gas, these were Erdogan incentives before May’s general election.
Erdogan had fired three central bank governors who resisted pressure to cut interest rates before appointing Kavcioglu in 2021. Naci Agbal, who proceeded Kavcioglu, was removed from his post days after he raised rates.
A medium-term economic plan released this month forecasts inflation reaching 65 per cent by year-end.
Lira Trampled Underfoot
The value of the Lira to the dollar has dropped by 78% in the last five years with a third of that loss in 2023. The Turkish lira weakened slightly to 27.06 against the dollar on the rate hike, with the US dollar up 0.3% against the Lira.
Turkey is funding its unusual economic approach in part with an influx of money from Russia. Mr. Erdogan has deepened Turkey’s economic relationship with Russia this year and lately with Saudi Arabia. Turkey is boosting trade and allowing Moscow to turn to Turkey to ease the effect of Western sanctions. Erdogan turned to Russia to bolster the Turkish economy, accelerating trade between the two countries and welcoming inflows of Russian money that have helped Turkey shore up the foreign assets needed to stabilize the lira.
From The TradersCommunity News Desk