In a significant policy turnaround, Turkey’s central bank is poised to raise its policy rate by a substantial 1,150 basis points on Thursday, according to recent polls. The move comes after a series of rate cuts under President Tayyip Erdogan’s unorthodox economic policies led to a severe cost-of-living crisis and currency depreciation. With the recent appointment of investor-friendly officials to key economic positions, there are hopes that Turkey will embrace more orthodox policies to stabilize its economy.
Background
Under President Erdogan’s unconventional economic approach, interest rates were reduced from 19% to 8.5% in late 2021, despite rising inflationary pressures. However, these rate cuts resulted in a currency crisis and further exacerbated inflation, which reached a 24-year high of 85.5% last year. To stabilize the lira’s exchange rate, the central bank’s reserves were depleted through interventions in the foreign exchange market. Faced with economic turmoil, President Erdogan appointed Mehmet Simsek as finance minister and Hafize Gaye Erkan as central bank governor, raising expectations of a policy shift. In addition, last week, Erdogan seemed to indicate that he has approved the implementation of rate hikes, but with the condition that his own perspectives remain unchanged. Lastly, over the weekend, he highlighted that his new economic team’s top priority would be to bring down the country’s inflation rate from its current staggering level of around 40% to single digits.
Reform-Minded Economic Team
The appointment of Mehmet Simsek, a well-regarded figure in financial markets, as finance minister, and Hafize Gaye Erkan, a former Wall Street banker, as central bank governor has generated optimism about a shift toward more investor-friendly policies. The market perceives these appointments as a signal that Turkey may abandon its unorthodox economic approach, which has contributed to the significant depreciation of the lira since 2018. The presence of Simsek and Erkan suggests a potential return to gradual orthodoxy and a focus on stabilizing the economy.
Anticipated Interest Rate Hike
A Reuters poll of 15 economists suggests that the one-week repo rate is expected to rise to 20% (Bloomberg consensus points to the same level), marking the first rate hike since March 2021. Forecasts ranged from 12.5% to 30%, reflecting the uncertainty surrounding the central bank’s upcoming decisions.This morning, Bank of America Securities analysts predicted a gradual adjustment approach, with the central bank raising its policy rate to 25% and potentially signaling further hikes.
