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Attention! Violent interest rate hike of 650 basis points! The country's currency exchange rate has hit a record low.
Jun 29,2023
Since the beginning of June, the Turkish lira has been falling against the dollar, constantly setting new records. To ease inflation, the Turkish central bank recently raised interest rates by 650 basis points. Instead of boosting the lira, the move brought the lira exchange rate to another record low.
On June 22, Turkey's central bank announced a 650 basis point increase in its policy rate (1-week repo rate) from 8.5 percent to 15 percent, the country's first rate hike since March 2021, but below market expectations of 1150 basis points.
After the announcement of the interest rate hike policy, the lira fell below 24 against the dollar on the same day, down more than 4%.
The Central Bank of Turkey said in a statement that the Monetary Policy Committee decided to start the process of monetary tightening in order to establish an anti-inflation course as soon as possible, stabilize inflation expectations and control the deterioration of pricing behavior.
The central bank will implement further monetary tightening in a timely and gradual manner as needed until the inflation outlook improves significantly. However, some market participants believe that the current interest rate hike by the Turkish central bank is not enough.
In May, Turkey's CPI fell to 39.59 per cent but remained high, while its CPI grew 85.51 per cent year-on-year in October 2022, the highest in 24 years. Turkey's policy rate fell from 19 per cent in late 2021 to 8.5 per cent in March this year.
Some analysts pointed out that the interest rate hike policy implies that Elkan intends to "proceed cautiously" to avoid conflicts with Erdogan.
The central bank is not independent of Erdogan. Even as inflation continues to rise, Erdogan has instructed Turkey's central bank to continue to cut borrowing rates in 2020 and 2021, while the governor of the central bank who opposed it has been sacked by him.
Specifically, Murat Cetinkaya, governor of Turkey's central bank in 2019, was exempted because the interest rate cut was not quick enough. Successor Murat Uysal was dismissed in 2020 as the Turkish lira exchange rate hit a record low. Naci Agbal in 2020 was dismissed by Erdogan after less than five months in office because of excessive interest rate hikes (875 basis points to 19%), while the exchange rate of the US dollar against the lira rose from 8.48 to 7.15 during his term.
Since then, Turkey's central bank has been led by its former governor, Shahap Cavchioglu, for more than two years.
On June 26, the lira continued its downward trend. As of press time, the exchange rate of the US dollar to the lira was 26.0708, refreshing the historical low 25.7 last week.
Since the beginning of this year, the lira has depreciated by more than 27%, and in June alone it depreciated by more than 19%. In early June, the dollar was trading at around 20.9 to the lira.
After the re-election of Turkish President Recep Tayyip Erdogan in late May, the market showed concern about his "unorthodox" economic policies, but also expected Turkey to change its unorthodox economic policies over the years, which included sharp cuts in interest rates in the event of soaring inflation.
In June, Fitzer Guy Erkan was appointed by Erdogan as Turkey's first female central bank governor.
Elkan, 44, served as the co-CEO of the First Republican Bank of the United States, which collapsed in May this year, and also served as a balance sheet and risk for the board and senior management of large U.S. banks and insurance companies. Management issues consulting, is a member of the Advisory Committee of the Department of Operations Research and Financial Management at Princeton University.
Elkann argues for curbing inflation by raising interest rates and easing the depreciation of the lira. The market believes that Erkan's appointment means that Erdogan has completed the reorganization of his economic team, which includes the new Turkish Finance Minister Mehmet Simsek (Mehmet Simsek) who took office in early June. He is known by foreign investors as Turkey's traditional advocate of economic policies, transparency and central bank independence.
The market has generally expected that the restructuring will bring an opportunity for Turkey's monetary policy shift to return to "tradition", and the Turkish central bank will increase interest rates in June.
In August 2018, the Turkish lira plummeted against the US dollar due to the US increase in import tariffs on Turkish steel and aluminum products, accompanied by increased inflation.
Generally speaking, the common way to fight inflation is to raise interest rates, but Turkish President Recep Tayyip Erdogan has long opposed high interest rates, believing that high interest rates are the cause of high inflation, and the Turkish central bank has cut interest rates continuously. And every rate cut has led to a sustained decline in the lira. Over the past three years, the lira has lost 67% of its value against the dollar.
The continued depreciation of the lira may still reflect the market's concerns about Erdogan's economic policies after his re-election.
Raising interest rates runs counter to Erdogan's principle of "managing inflation with low interest rates. As a result, the first 100 days of the new finance minister, Simsek, will also be watched by the market, which will test the scope of his power and how he will cooperate with other economic sectors, such as the Turkish Central Bank.
Wolfango Piccoli, an analyst at Teneo, a policy risk consulting firm, said that it remains to be seen whether Erdogan can shift to a more pragmatic economic policy. moreover, kavchiolu, who faithfully implements Erdogan's policies, still holds an important position in Turkey's banking supervision authority, which shows that "Erdogan economics" has not disappeared and may even "fight back at any time".
Looking ahead to the interest rate outlook, some analysts also pointed out that the Turkish central bank's moderate and gradual pace of interest rate hikes is wise. Turkey's return to orthodox economic policy is also gradual. In the future, the central bank may further raise interest rates according to the needs of economic operation. Under the effect of tightening monetary policy, Turkey's high inflation is expected to be alleviated to some extent.
However, economists also believe that the country's economy is currently facing multiple challenges. In addition to severe inflation and slowing economic growth, the trade deficit in the first five months of this year increased by 30% year-on-year. For the Turkish economy to truly get out of the downturn, monetary policy tightening needs to be accompanied by reforms such as economic restructuring.
To this end, on June 25, local time, the Turkish central bank began to cancel some of the dozens of rules and regulations passed since 2021, which make debt, credit and foreign exchange markets strictly regulated by the state.
The central bank said the measures were aimed at freeing up the market and ensuring stability, which would encourage the market to hold lira.
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