Turkey’s central bank eventually embarked on a radical monetary policy U-turn. For a long time, President Recep Tayyip Erdogan used to set the tone for monetary policy. Recently, he decided to loosen his grip on the central bank. Newly appointed Governor Hafize Gaye Erkan announced a long-awaited rate hike from 8.5% to 15%. The sharp rate increase came out as a bombshell.
Recep Tayyip Erdogan’s victory in the presidential elections opened a new chapter in the central bank’s history. Erdogan introduced a new central bank Governor in early June. Before this appointment, Erkan served as a top executive at Goldman Sachs and First Republic banks. The President pledged to provide the new economic team with more leverage for decisions. Analysts predicted that the new Governor would shift to a traditional monetary policy. This is what actually happened. In a widely expected move, the central bank responded to soaring inflation with a rate hike.
“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 central bank said in a statement.
Curiously, some experts reckon that even the jumbo rate hike was not enough. The rate hike of 20% would have been appropriate under the current economic conditions. The central bank failed to prop up the national currency. In practice, the Turkish lira instantly slumped in response to the policy announcement. The lira surpassed the level of 24 against the US dollar for the first time ever. The Turkish currency has weakened by more than 30% since the beginning of 2023.
“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. Inflation data will be closely monitored. The central bank will employ all available tools to reach its prior goal: to ensure price stability,” the policy statement reads.
