Turkey’s central bank surprised economists by delivering a lower-than-expected interest rate hike, signaling a gradual transition from ultra-cheap money. In the first meeting under new governor Hafiza Arkan, the Monetary Policy Committee raised the benchmark rate to 15% from 8.5%, much lower than the anticipated 20% or more. The committee stated that monetary policy tightening will be done gradually as needed.
This interest rate hike, the first in over two years, marks a turning point in Turkey’s departure from unorthodox policies that have driven away foreign investors and led to spiraling prices. However, skeptics have questioned whether President Recep Tayyip Erdogan, who has long been opposed to high interest rates, would allow Arkan to have a free hand. Investors expressed disappointment, with some suggesting that the new economic team may have limited influence in delivering a quick and comprehensive fix to boost market credibility.
Erdogan began moving toward a policy reset after winning the presidential election. He reinstated former Merrill Lynch strategist Mehmet Simsek as finance minister and appointed Erkan as the head of the central bank. Arkan, Turkey’s first female central bank governor, has a background in finance, having worked at Goldman Sachs Group Inc. and First Republic Bank in the US.
While the interest rate hike came as a surprise to the market, authorities had tried to manage expectations ahead of the meeting. A senior Turkish economic official warned that the market’s expectation of a significant interest rate increase might not materialize. The actual hike was less than the average forecast, raising interest rates by 1,250 basis points to 21%. This move indicates that Erdogan has accepted traditional fiscal policy to curb high inflation rates.
Inflation in Turkey reached a 24-year high of 85.5% in October but has since fallen to less than 40%. Moody’s has stated that Turkey’s shift to traditional economic policies will have a positive impact on its credit rating.
Overall, the interest rate hike by Turkey’s central bank reflects a gradual transition towards more conventional monetary policies, aiming to stabilize the economy and regain investor confidence.
What was the rationale behind Turkey’s central bank surprising economists with a lower-than-expected interest rate hike?
Turkey’s central bank surprised economists with a lower-than-expected interest rate hike, signaling a gradual shift away from ultra-cheap money. In the first meeting under new governor Hafiza Arkan, the benchmark rate was raised to 15% from 8.5%, much lower than the anticipated 20% or more. The committee stated that monetary policy tightening would be done gradually as needed.
This interest rate hike, the first in over two years, marks a turning point in Turkey’s departure from unorthodox policies that have driven away foreign investors and led to spiraling prices. However, skeptics have questioned whether President Recep Tayyip Erdogan, who has long opposed high interest rates, would allow Arkan to have the freedom to act. Investors have expressed disappointment, suggesting that the new economic team may have limited influence in quickly and comprehensively fixing the market’s credibility.
Erdogan began to reset policies after winning the presidential election. He reinstated former Merrill Lynch strategist Mehmet Simsek as finance minister and appointed Arkan as the head of the central bank. Arkan, Turkey’s first female central bank governor, has a background in finance, having worked at Goldman Sachs Group Inc. and First Republic Bank in the US.
While the interest rate hike came as a surprise to the market, authorities had tried to manage expectations before the meeting. A senior Turkish economic official warned that the market’s expectation of a significant interest rate increase might not happen. The actual hike was less than the average forecast, raising interest rates by 1,250 basis points to 21%. This move indicates that Erdogan has accepted traditional fiscal policy to curb high inflation rates.
Inflation in Turkey reached a 24-year high of 85.5% in October but has since fallen to less than 40%. Moody’s has stated that Turkey’s shift to traditional economic policies will positively impact its credit rating.
Overall, the interest rate hike by Turkey’s central bank reflects a gradual transition towards more conventional monetary policies in an effort to stabilize the economy and regain investor confidence.
