Turkey’s central bank said last month’s interest-rate raise was the “first step” of a monetary tightening cycle, as the administration of newly-reelected President Recep Tayyip Erdogan tries to slow inflation of almost 40%.
(Bloomberg) — Turkey’s central bank said last month’s interest-rate raise was the “first step” of a monetary tightening cycle, as the administration of newly-reelected President Recep Tayyip Erdogan tries to slow inflation of almost 40%.
Last month’s decision to increase the benchmark to 15% from 8.5% was meant to “establish the disinflation course as soon as possible,” the bank said in a summary, published on Monday, of its June 22 Monetary Policy Committee meeting.
It was the bank’s first hike in more than two years and signaled a shift from Turkey’s strategy of boosting economic growth through ultra-low interest rates, which investors blamed for triggering a surge in inflation. It was also the first rate decision under Governor Hafize Gaye Erkan, who was appointed soon after Erdogan won a presidential vote in May to extend his rule into a third decade.
Yet the move underwhelmed traders, who were mostly expecting a bigger raise. Turkey still has one of the world’s lowest real rates and the lira has dropped almost 10% against the dollar since the decision, extending its loss this year to 28%. On Monday, Turkish state-run commercial banks sold as much as $1 billion to prop up the currency, according to traders.
Turkey is scheduled to release inflation numbers for June on Wednesday. Economists expect price rises to slow slightly to 38.9%, according to the median estimate of a Bloomberg survey. The central bank’s next rate decision is on July 20.
Erkan’s predecessor, Sahap Kavcioglu, eased monetary policy significantly, in line with Erdogan’s belief that low rates were the best way tackle price rises.
Other key insights from the summary:
- The MPC is assessing the impact of rate hikes on inflation, credit expansion and economic activity, including through banking stress tests
- The central bank’s current micro- and macro-prudential framework is “weak” when it comes to ensuring financial stability; the framework will be strengthened and simplified
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.