The Central Bank of the Republic of Turkey (CBRT) raised the policy rate to 15 percent on June 22 after almost two years of low-interest rate policies
The the Monetary Policy Committee (MPC) which held its first meeting under the chairmanship of Central Bank Governor Hafize Gaye Erkan, switched to a monetary tightening policy by raising the policy rate from 8.5 percent to 15 percent.
“MPC has decided to increase the policy rate (the one-week repo auction rate) from 8.5 percent to 15 percent. The Committee decided to begin the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior,” the statement read on June 22.
“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved. Indicators of inflation and the underlying inflation trend will be closely monitored and the CBRT will continue to decisively use all the tools at its disposal in line with its main objective of price stability,” the committee added.
Low interest rate policy
Despite rising inflation since 2021, the CBRT has maintained its stimulus policy with a low policy rate to boost export-led growth. The rate of increase in inflation, which rose to 83 percent last September, was 54 percent as of May.
The Turkish Lira kept suffering from depreciation after the critical parliamentary and presidential elections held in May. As of June 22, one dollar is trading at 23.56 liras.
In addition to the increase in inflation and the currency crisis, concerns have been growing in the banking sector. Financial sector executives criticized the practice, saying that low-interest and long-term bonds in a high inflation environment would create systemic risks for the banking system.
Experts predicted that the CBRT would gradually lift regulations and raise interest rates under the new government formed by the Erdoğan after his re-election on May 28 elections.
While international banks indicated that the interest rate could be raised by 20 to 30 percent in the first phase, the risk of the country’s economy entering recession with a sudden increase was also voiced.
Same policy but no obstacles
After the appointment of Mehmet Şimşek as the new Treasury Minister there were expectations that Erdoğan might soften the low interest rate policy, which he had fiercely defended.
“We have accepted that our Treasury and Finance Minister will take the steps with the Central Bank,” Erdoğan said in his group meeting on June 14, stating that there would be no change in his policies.
Following Erdoğan’s remarks, MHP leader Devlet Bahçeli, a partner in the People’s Alliance, pointed out in this week’s group meeting that a possible interest rate hike would not face any political obstacles.
Bahçeli said, “An interest rate hike is a political choice that puts a spoke in the wheel of production. However, there are short-term and sometimes painful measures for Turkey’s economic prosperity, it has become inevitable to bear today’s burden,” Bahçeli said.