Wednesday, December 6, 2023

Turkey raises interest rates to 30% and takes a hard line against inflation

The Blitzkrieg of Central Bank of Türkiye (TCMB) The fight against inflation continues its course under the command of the governor Hafize Gaye Erkan who took over the management of the institution in May and has implemented four mega interest rate hikes. The most recent one occurred this Thursday with a Increase of 500 basis points or 5 percentage points which increase the reference interest rate from 25% to 30%.

The hard doctrine against inflation is trying to stop the wave of inflation as quickly as possible. In just four months, interest rates in Turkey rose by 21.5 percentage points from 8.5% to 30%. “The committee decided to continue the currency adjustment process with the In order to set the disinflationary course as quickly as possible, inflation expectations should be anchored and control the deterioration in price behavior,” the institute said in its statement.

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According to TCMB, inflation readings were above expectations in July and August. He Consumer price growth has been reactivated to almost 60% despite the attempted recovery that the lira is experiencing in its value against the euro or the dollar, at an annual rate.

“As the strong development of domestic demand and rigid inflation in the services sector remain, Rising oil prices and the continued deterioration in inflation expectations pose additional upside risks to inflation. “These factors suggest that year-end inflation is close to the upper limit of the forecast range indicated in the inflation report,” he emphasizes.

According to the Turkish Central Bank foreign direct investment, improving external financing conditions the continued increase in foreign exchange reserves, the positive impact of tourism receipts on the current account balance and the growing domestic and external demand for Turkish lira-denominated assets will contribute significantly to price stability.

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“The The key interest rate is set in such a way that the necessary monetary and financial framework conditions are created to ensure a weakening of the underlying trend of inflation and to achieve the inflation target of 5 percent in the medium term. “Currency adjustment will be increased in a timely and gradual manner to the extent necessary until a significant improvement in the inflation outlook is achieved,” the TCMB warns in its statement to the market.

The The central bank’s decision follows a series of painful interest rate hikes to finance Turkish households and businesses as the country tries to reverse several years of out-of-control inflation and a battered currency. The lira had lost 30% against the euro so far in 2023 and around 78% of its value over the past five years, coinciding with Erdogan’s greater interventionism. The decision to resign after the last presidential election has led to a 180-degree turn in Turkey’s economic and monetary policy.

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The The orthodoxy of economic theory argues that interest rates must be raised to cool inflation, but Erdogan did the opposite as inflation continued to rise, stopping all the central bank’s critics from putting their theories into practice. Turkey cut its interest rates from 19% at the end of 2021 to 8.5% last March after inflation rose to 80%. In June, the consumer price index slowed to 40% annually but recovered.

Nation World News Desk
Nation World News Desk
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