Turkish lira falls as Erdogan’s policy shift fails to impress

ByNews Desk- The Cradle 

The Turkish president gave the green light for a large interest rate increase, but this proved insufficient to fight the country’s soaring inflation

A money changer counts Turkish lira banknotes at a currency exchange office in Ankara, Turkey. 27 September, 2021. (Photo credit: Reuters/Cagla Gurdogan)

The Turkish lira fell to a new record low on 23 June following yesterday’s 6.5 percent rate hike by the central bank, Reuters reported.

The significant rate hike, which reversed President Recep Tayyip Erdogan’s previous unorthodox monetary policy, fell short of market expectations, leading to the lira’s 2.8 percent crash today.

At its lowest point in early trading, the lira had lost 27 percent against the dollar since the beginning of the year.

Turkiye’s central bank raised its key rate by a full 6.5 percent to 15 percent on Thursday, 22 June, in hopes of taming inflation. Still, analysts had expected new central bank governor Hafize Gaye Erkan to raise rates to roughly 21 percent.

However, Erkan, a former Wall Street executive for Goldman Sachs and First Republic Bank, appeared prepared to raise rates further moving forward.

The central bank’s policy committee said the 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 committee said it raised rates “to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior.”

The interest rate hike marked a reversal of years of monetary easing. Erdogan cut interest rates to 8.5% from 19% in 2021 in hopes of spurring domestic production and exports, but his unorthodox policy saw inflation in the Turkish economy accelerate to record levels.

Annual inflation fell to 40 percent in May after reaching a 24-year high of over 85 percent in October last year.

Central Bank head Erkan was appointed by Erdogan after his election victory last month, and it is unclear how much freedom she will have to make decisions independent of the Turkish president.

Another western friendly figure, economist and politician Mehmet Simsek was also appointed finance minister after Erdogan’s election.

Though Ergodan managed to retain power for another 5-year term, he came under significant criticism from voters due to his recent mismanagement of the economy, which prompted his recent shift in policy.

Reuters noted that “some analysts expressed doubt about Erdogan’s commitment to abandoning his unorthodoxy, citing examples of his previous shifts to orthodox policy only to quickly change his mind.”