Turkish Lira Hits Record Low Despite Central Bank Rate Hike

The Turkish lira hit a new record low on 23 June after the country’s central bank implemented a 6.5 percent rate hike, according to Reuters. The rate hike, which marked a reversal of President Recep Tayyip Erdogan’s unorthodox monetary policy, fell short of market expectations and resulted in a 2.8 percent crash of the lira.

In early trading, the lira had lost 27 percent against the dollar since the beginning of the year. The central bank of Turkiye raised its key rate by a full 6.5 percent to 15 percent on 22 June in an effort to combat inflation. However, analysts had anticipated a higher rate of around 21 percent from new central bank governor Hafize Gaye Erkan.

Erkan, a former Wall Street executive for Goldman Sachs and First Republic Bank, indicated that she was prepared to raise rates further in the future. The central bank’s policy committee stated that monetary tightening would be strengthened as needed until a significant improvement in the inflation outlook is achieved.

The interest rate hike marked a departure from years of monetary easing under Erdogan, who had reduced interest rates from 19 percent to 8.5 percent in 2021 to stimulate domestic production and exports. However, this unorthodox policy led to a surge in inflation in the Turkish economy, with annual inflation reaching a 24-year high of over 85 percent in October last year. In May, inflation fell to 40 percent.

Erkan’s appointment by Erdogan after his recent election victory raises questions about her independence in decision-making. Economist and politician Mehmet Simsek, who is seen as a western-friendly figure, was also appointed as finance minister after Erdogan’s election.

Erdogan faced significant criticism from voters due to his mismanagement of the economy, prompting his shift in policy. However, some analysts expressed doubt about Erdogan’s commitment to abandoning his unorthodox approach, citing his history of quickly changing his mind on policy matters.

The Turkish lira’s record low reflects the challenges facing the country’s economy and the need for effective measures to address inflation and stabilize the currency. The central bank’s rate hike is a step in the right direction, but further actions may be necessary to restore confidence in the lira and promote economic stability.

What concerns have been raised regarding the independence of the new central bank governor and her ability to make decisions without political interference

The Turkish lira hit an all-time low on June 23rd following the implementation of a 6.5% interest rate hike by the country’s central bank. This unexpected move, which marked a departure from President Recep Tayyip Erdogan’s unconventional monetary policies, fell short of market expectations and led to a 2.8% drop in the lira’s value.

The lira had already suffered a 27% loss against the dollar since the beginning of the year, prompting the central bank of Turkiye to raise its key interest rate to 15% on June 22nd in an attempt to combat inflation. However, analysts were anticipating a higher rate of around 21%, proposed by the new central bank governor, Hafize Gaye Erkan.

Erkan, a former Wall Street executive, has indicated her willingness to further increase interest rates in the future. The central bank’s policy committee stated that they would continue to tighten monetary policy as needed until a significant improvement in the inflation outlook is achieved.

This interest rate hike is a significant departure from Erdogan’s years of monetary easing, during which interest rates were reduced from 19% to 8.5% in 2021 to stimulate the domestic economy and boost exports. However, this unorthodox approach resulted in a surge in inflation, with annual inflation reaching a 24-year high of over 85% in October of last year. In May, inflation fell to 40%.

Erkan’s appointment by Erdogan, following his recent election victory, has raised concerns about her independence in decision-making. Economist and politician Mehmet Simsek, known for his pro-western stance, was also appointed as finance minister after the election.

Erdogan’s mismanagement of the economy led to significant criticism from voters, ultimately prompting this shift in policy. However, some analysts remain skeptical of Erdogan’s commitment to abandoning his unconventional approach, citing his history of swiftly changing his mind on policy matters.

The record low of the Turkish lira reflects the challenges faced by the country’s economy and the need for effective measures to address inflation and stabilize the currency. While the central bank’s interest rate hike is a step in the right direction, further actions may be necessary to restore confidence in the lira and promote economic stability.