As Turkey grapples with inflation, the central bank enhanced rates again

June 26, 2023: On Thursday, Turkey’s central bank jacked up the country’s key interest costs, nearly tucking it from 8.5% to 15% as the new economic administration of newly reelected President Recep Tayyip Erdogan embarked on a dramatic monetary policy.

The bank said there would be further gradual monetary tightening until the inflation picture in the country improves.

The whopping 650 origin point rate rise is the country’s first since March 2021 but was below analyst anticipation of a 1,150-basis point hike to 20%.

“The Committee decided to begin the monetary tightening process to establish the disinflation course as soon as possible, to anchor inflation expectations, and to prevent the deterioration in pricing behavior,” the central bank, led by newly appointed Governor Hafize Gaye Erkan, said in a report.

However, some analysts criticized the central bank’s move as not going far enough.

“Disappointing. Not enough,” Timothy Ash, an emerging markets strategist at BlueBay Asset Management, wrote in a note via email. “They needed to front-load hikes. The demand won’t like that.”

The Turkish lira cut to around 24.1 against the dollar following the news, from 23.54 before the decision was reported, a record low, according to data.

George Dyson, a senior analyst at the consultancy Control Risks, believes there will be further hikes to improve the policy rate to 20% or higher.

Turkish Finance Minister Mehmet Simsek “has to be a little cautious,” he said. “I’m confident he is worried regarding inadvertently triggering a debt problem by delaying the economy too fast.”

Hamish Kinnear, a senior Middle East and North Africa analyst at risk intelligence firm Verisk Maplecroft agreed.

“This is a sign that the recent governor is looking to tread carefully to avoid a conflict with President Erdogan; the previous central bank governor to hike interest prices was fired by the president after less than five months in the post,” Kinnear said.