Turkey’s Taksim Square, with the figure of Kemal Ataturk, the first president, and the Turkish flag in the background.
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The Turkish lira witnessed a significant drop as Turkey’s central bank implemented a surprising 650 basis points increase in the benchmark interest rate, leading to a dramatic shift in monetary policy.
In a historical move, the central bank raised the key interest rate from 8.5% to 15% on Thursday, marking the first hike since March 2021. However, this figure fell short of Reuters’ projected rate of 21%.
The lira, which has been consistently depreciating since President Recep Tayyip Erdogan’s reelection, is currently trading at 24.97 against the US dollar.
Steve Hanke, a professor of applied economics at Johns Hopkins University, commented on the situation, stating, “[The lira] is experiencing a significant decline and is likely to continue doing so as they attempt to catch up.” Hanke also noted that the central bank’s decision is “slightly behind the curve.”
Newly appointed Governor Hafize Gaye Erkan hinted at the possibility of further rate hikes until there is a noticeable improvement in the country’s inflation situation. In a statement, Erkan mentioned that “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.”
Government statistics reveal that the annual inflation rate in Turkey for May stood at 39.59%. Last October, the country experienced an inflation rate of 85.51%.
Turkish Finance Minister Mehmet Simsek emphasized the importance of a predictable fiscal policy and a free exchange rate regime in stabilizing and restoring reliability to the Turkish lira. However, Hanke argued that these measures alone would not be sufficient.
Hanke stated, “Monetary policy isn’t solely determined by interest rates. It also considers the growth and quantity of money.” He further highlighted that Turkey’s money supply is growing too rapidly, with a year-over-year rate of increase of approximately 50%.
Goldman Sachs analyzed the rate hike and concluded that the central bank intends to maintain its unconventional framework, focusing on macro prudential measures and quantity restrictions rather than rate-based access to TCMB liquidity for tightening policy. However, the analysts warned that these efforts may be limited without a rates-based monetary policy stance that enhances the stability and resilience of Turkey’s financial system.
The rapid decline of the lira surpassed the forecast of investment banks within just three days.
