Turkey’s central bank has raised its interest rates for the fourth consecutive time, now increasing its benchmark rate from 25 percent to 30 percent.
This move aligned with expectations but fell short of the market’s more aggressive anticipations for curbing nearly 60 percent inflation.
As a result, the lira, which initially gained ground, reversed its course. The Turkish Monetary Policy Committee (MPC) has reaffirmed its commitment to a gradual approach, saying it will continue to do so until a substantial improvement in the inflation outlook is realized.
Market dissatisfaction
Considering the rising cost-of-living crisis, even a seemingly impossible series of interest rate increases no longer proves effective. Adjusted for inflation, Turkish interest rates are now dropping even further into negative territory.
As the lira heads towards its worst day against the dollar this month, the market is signaling its dissatisfaction with the central bank’s decision. According to Henrik Gullberg, a macro strategist at Coex Partners Ltd., the bank’s decision was inadequate. As of 4:07 p.m. in Istanbul, the lira was trading approximately 0.3 percent weaker against the U.S. currency.
“The Turkish central bank needs to over-deliver in order to make a difference,” Gullberg said.
In this challenging situation, Turkish president Recep Tayyip Erdogan’s new team of technocrats is bound to face many obstacles. These challenges involve attracting investors who have steered clear of Turkey.
The investors’ reluctance is primarily a result of years marked by unpredictable and unconventional policies that have disrupted the country’s economy.
The central bank, initially criticized for cautious rate hikes since governor Hafize Gaye Erkan’s appointment in June, has accelerated its pace. Last month, it surprised most observers by raising rates by 750 basis points.
In a statement released on Thursday, the central bank expressed its strong commitment to “establish the disinflation course in 2024.”
International skepticism
The central bank is expected to continue gradually increasing rates, reaching 35 percent by the end of the year, as indicated in the September 21 decision.
Ahead of local elections in March, rates are projected to remain at 35 percent throughout the first quarter of 2024, with the possibility of further rate hikes in the second quarter of 2024, as economist Selva Bahar Baziki suggested.
In a notable policy shift, president Erdogan has appeared to embrace monetary tightening this month. This is a departure from his historical stance, which favored ultra-low interest rates to combat inflation. During an investor presentation in New York, finance minister Mehmet Simsek emphasized that addressing inflation is now Turkey’s top priority.
Even so, Erdogan’s new approach still faces skepticism on the international stage. This arises from his track record of emphasizing economic growth and removing three consecutive central bank governors he considered too cautious.
The Turkish lira has experienced a depreciation of around 31 percent against the U.S. dollar, positioning it as one of the most fragile currencies within emerging markets.
“Inflation has been rising more rapidly than the policy rate since July,” said Thomas Gillet, lead analyst on Turkey at Scope Ratings. “Reversing that trend so that the central bank gets ahead of the curve is certainly one of the biggest challenges currently.”
The inflation situation has worsened in recent months, with monthly price increases surging by more than nine percentage points in both July and August. A central bank survey revealed that analysts anticipate inflation to approach nearly 70 percent by the end of this year, surpassing the government’s estimate of 65 percent.