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

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

The significant rate hike, which reversed President Recep Tayyip Erdogan’s earlier unorthodox monetary policy, fell short of market expectations, sending the lira crashing 2.8 percent today.

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

Turkey’s central bank raised the key interest rate by as much as 6.5 percent to 15 percent on Thursday, June 22, in the hope of curbing inflation. Analysts had nevertheless expected the new central bank governor Hafize Gaye Erkan to raise the interest rate to approximately 21[ads1] percent.

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

The central bank’s policy committee said monetary tightening “will be further strengthened as much as necessary in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.”

The committee said it raised interest rates “to establish a course for disinflation as soon as possible, to anchor inflation expectations and to control the deterioration in price behavior.”

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

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

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

Another Western-friendly figure, the economist and politician Mehmet Simsek, was also named finance minister after Erdogan’s election.

Although Ergodan managed to retain power for another five-year term, he came under considerable criticism from voters due to his recent mismanagement of the economy, leading to his recent shift in politics.

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

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