Ankara is preparing to raise interest rates by a large percentage in an effort to contain inflation and stabilize the price of the Turkish lira. This decision comes after two years of implementing economic policies outside the traditional approach, which were prompted by President Recep Tayyip Erdogan. Erdogan, who was re-elected for a third term in late May, has long held the belief that high interest rates fuel inflation, contrary to traditional economic theories.
The Turkish Central Bank has been forced to reduce interest rates over the past two years as part of a “new economic model” aimed at encouraging growth and job creation. However, Erdogan’s recent appointments of Muhammad Simsek, a former economist at the American Merrill Lynch Bank, as Minister of Economy, and Hafiza Ghaya Erkan, a former Wall Street official, as governor of the Central Bank, suggest a possible return to policies closer to the traditional approach.
Simsek, who previously held the Ministry of Economy between 2009 and 2015, warned that rational measures would be necessary to advance the Turkish economy. Erdogan has often cited the teachings of Islam that prohibit usury and has claimed that high interest rates are promoted by a foreign “lobby.” However, he recently stated that he accepts his new team’s measures, even if they contradict his convictions.
Analysts believe that a high main interest rate, currently stable at 8.5 percent since the end of February, may help revive the Turkish economy. In early June, the Turkish lira fell by more than 7% to new record lows against the dollar and the euro. On the eve of the central bank’s expected decision, the Turkish currency was trading at about 23.6 liras per dollar.
There is divided opinion among analysts on the form an interest rate hike might take. An economist at Goldman Sachs believes that an official who follows the traditional approach will raise interest rates by 40%, bringing them to the level of effective effective interest rates. In contrast, JPMorgan and Bank of America expect an increase of 25%.
To seek new investments and loans, Simsek and the new vice president, Cevdet Yilmaz, who is also a technocrat supported by investors, flew to Abu Dhabi on Thursday. This move indicates Ankara’s efforts to attract foreign investments and stabilize the Turkish economy.
What are the different predictions regarding the magnitude of the interest rate hike and what is the reasoning behind them
Ankara is gearing up to raise interest rates significantly in an effort to curb inflation and stabilize the value of the Turkish lira. This decision comes after two years of implementing unconventional economic policies, influenced by President Recep Tayyip Erdogan’s beliefs. Despite his reelection in May, recent appointments within the government suggest a potential return to more traditional economic approaches.
Over the past two years, the Turkish Central Bank has had to lower interest rates as part of a “new economic model” aimed at promoting growth and job creation. However, with the appointment of Muhammad Simsek, a former economist at Merrill Lynch Bank, as Minister of Economy, and Hafiza Ghaya Erkan, a former Wall Street official, as governor of the Central Bank, there are indications of a possible shift towards more conventional policies.
Simsek, who previously served as the Minister of Economy from 2009 to 2015, has warned that rational measures are necessary for the advancement of the Turkish economy. Erdogan, on the other hand, has frequently referred to Islamic teachings that prohibit usury and has claimed that high interest rates are encouraged by foreign “lobbies.” However, he recently stated that he will accept the measures proposed by his new team, even if they contradict his own beliefs.
Analysts believe that a high main interest rate, which has remained stable at 8.5% since the end of February, could help revive the Turkish economy. In early June, the Turkish lira experienced a sharp decline of over 7% against the dollar and the euro, reaching record lows. Just before the central bank’s expected decision, the Turkish currency was trading at around 23.6 liras per dollar.
Opinions among analysts vary regarding the magnitude of the interest rate hike. An economist at Goldman Sachs predicts a 40% increase, bringing interest rates to levels considered effective. On the other hand, JPMorgan and Bank of America expect a more conservative 25% hike.
To attract new investments and loans, Simsek and the new vice president, Cevdet Yilmaz, who is also favored by investors, recently traveled to Abu Dhabi. This move highlights Ankara’s efforts to stabilize the Turkish economy and attract foreign investments.