The entrance to the Turkish Central Bank on June 9, 2023 in Ankara (AFP / Adem ALTAN)
Turkey’s central bank raised its key rate to 15% on Thursday in a major policy reversal, abandoning for the first time in two years the unconventional economic measures promoted by Turkish President Recep Tayyip Erdogan.
The bank thus raised its key rate from 8.5% to 15% during its first monetary policy meeting since the re-election of the Turkish head of state in May.
The decision is aimed at “monetary tightening in order to establish the course of disinflation as soon as possible”, the central bank said in a press release.
“Monetary tightening will be increased as much as necessary, in a timely and gradual manner until a significant improvement in the outlook for inflation is achieved,” she added, hinting that the rise in rates could continue in the coming months.
Mr. Erdogan said last week that his conviction on the need to lower rates remained “unchanged”. He nevertheless hinted that he had agreed to a rate hike.
Analysts believe that a sharp rise in the key interest rate could help revive the Turkish economy.
Contrary to conventional economic theories, Mr. Erdogan, re-elected at the end of May for a third term, believes that high interest rates promote inflation.
For the past two years, he has forced the Turkish central bank to cut rates as part of a “new economic model” that favors growth and job creation.
But this choice contributed to the surge in inflation – which in May fell below 40% for the first time in sixteen months, according to official figures – as well as to the fall of the Turkish lira which lost more than 80% of its value against the dollar in five years.
Independent economists dispute the official rate of inflation and estimate it at more than 100%.
They also criticize Turkey’s central bank for spending nearly $30 billion to prop up the national currency between Jan. 1 and the presidential election, pushing its foreign exchange reserves into negative territory for the first time since 2002.
At the beginning of June, the Turkish lira fell by more than 7% and reached new record lows against the dollar and the euro. The Turkish currency was trading around one dollar for 23.6 pounds on Wednesday.
-“Rational measures”-
The Head of State has given signs of a possible return to more conventional policies since his re-election, in particular by appointing a former economist from the American bank Merrill Lynch, Mehmet Simsek, to the Ministry of the Economy, and a former Wall Street executive Hafize Gaye Erkan, head of the central bank.
When he took office, Mr. Simsek, already Minister of the Economy (2009-2015) then Deputy Prime Minister in charge of the Economy (until 2018), warned that it would be necessary to return to “measures rational” to revive the Turkish economy.
Mr. Erdogan has several times in the past invoked the precepts of Islam, which prohibits usury, and claims that high interest rates are promoted by a foreign “lobby”. However, he said last Wednesday that he “accepted” that his new team could take measures that contradict his convictions.
Mr. Simsek and new Vice President Cevdet Yilmaz flew to Abu Dhabi on Thursday to mobilize new investments and loans. The appointment of Mr. Simsek and Ms. Erkan had been applauded by the markets.
But observers fear that the field of action of the new team will be restricted in the short term by the Turkish president who has already waltzed off several ministers and governors of the central bank when they contradicted his decisions.
One of the costliest programs in Turkey involves a bank deposit protection scheme that Mr Erdogan rolled out at the end of 2021. It commits the government to cover any loss suffered by Turkish lira deposits as the currency depreciates. .
This means that a rapid return to a floating exchange rate could weigh even more heavily on the strained budget. Many expect Mr. Simsek to phase out the program.