image source, Emin Sansar/Anadolu Agency via Getty Images
Interest rates will be decided by the new central bank chief, Hafizeh Gay Elkann, who took office this month.
Turkey is poised to reverse some of President Recep Tayyip Erdogan’s unconventional economic policies as his new economic team seeks to curb rampant inflation.
Less than a month after Mr. Erdogan’s re-election, interest rates are expected to rise significantly from their current level of 8.5%.
Inflation has reached almost 40% and Turks are in crisis of the cost of living.
However, Turkish leaders have so far insisted on lowering interest rates.
The big question is how far the key policy rate will rise. Economists are divided on how sharply the rate hikes will be, with U.S.-based investment bank Morgan Stanley suggesting an 11.5 percentage point increase to 20%, compared with Goldman Sachs. expects rate hikes to reach 40%.
Other economists think the rise will be steep, but perhaps more gradual.
Erdogan’s problem is that Turkey’s spending of billions to boost its lira has left Turkey’s inflation rate hovering high and its central bank’s foreign exchange reserves plummeting to dangerously low levels.
Economists have widely advocated raising interest rates to combat high inflation, but Turkey’s leaders have fired three central bank governors in less than two years for trying to stick to their orthodox policies.
Interest rates have fallen from 19% two years ago to 8.5% in recent months. Now they are on the rise again, and it will affect a country already in economic crisis.
“There are risks, but squaring the yen is hard,” said Ozge Ginioglu, a senior political lecturer at the University of Liverpool. “He has to do something for the economy, but a clear shift to orthodox economic policies would hurt large sections of society, and he doesn’t want to have that kind of impact on local elections. Let’s go [next year]. “
Turkey’s economy grew dramatically during the early years of President Erdogan’s leadership. But in recent years, he has abandoned traditional economic wisdom by blaming high borrowing costs for high inflation and boosting economic growth.
Over the past five years, the Turkish currency has lost more than 80% of its value and foreign investment has plummeted. Turks are now trying to transfer foreign currency from local banks.
Mehmet Kerem Koban of Qadir Has University said Turkey’s economic model needs capital to survive as its reserves are melting away.
Erdogan has been in power in Turkey for more than two decades. He defeated his opposition rivals in last month’s elections, but international observers said he suffered from an “unequal playing field” that gave incumbents an unfair advantage.
During the campaign, he maintained his theory that interest rates would stay low as long as he was in power, and assured that economic policy would remain unchanged. Opposition parties promised to drop their emphasis on low interest rates.
But within days of being re-elected, he signaled a change.
First, he appointed former banker and economist Mehmet Simsek as finance minister. Simsek, a former member of Erdogan’s government, has made it clear that Turkey’s only economic choice is to return to “reasonable grounds” and “compliance with international norms.”
He then appointed Hafizeh Gay Ercan, 44, as Turkey’s first female central bank governor. She is a well-known figure on Wall Street, but she has never held office in Turkey, and she was the chief executive of US bank First Republic before its collapse.
Erdogan said last week that his position on interest rates had not changed, but that “we have accepted it.” [Mr Simsek] It should take the necessary steps quickly and easily with the central bank. “
Emerging-markets expert Timothy Ashe believes Elkann will need to “accelerate rate hikes” rather than introduce rate hikes in stages. he warned on Twitter about the riskHe would suffer the same fate as his predecessor, who was “always trying to catch up with the market, waiting in the front room of the presidential palace to beg for a rate hike.”
