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The new head of Turkey’s central bank is committed to taking careful and decisive measures to curb inflation, despite acknowledging that it is projected to reach nearly 60% by the end of the year.
In her first major press conference since assuming office in June, Hafize Gaye Erkan stated that inflation would rise to 58% in December, a significant increase from the previous forecast of just over 22%. Erkan attributed this rise to the depreciation of the lira, surging food prices, and substantial increases in the minimum wage.
In a notable shift from the accommodative policies pursued by President Recep Tayyip Erdoğan’s government, the central bank has already raised interest rates by over 100% in the past two months and implemented other measures to tighten monetary policy, aiming to overcome the ongoing economic crisis.
Erkan indicated that the massive stimulus measures implemented earlier this year, ahead of the May election, had caused significant imbalances in Turkey’s economy, including excessive imports of consumer goods leading to a record current account deficit in the first five months of 2023.
Economists have stressed the need for policymakers to take further actions to combat inflation, which reached 38.2% in June, peaking at over 85% last October. Recent increases in petrol taxes and value-added taxes are expected to contribute to inflationary pressures as part of fiscal tightening efforts.
The higher inflation forecast by the central bank is seen as a positive signal to investors who were concerned that the bank would underestimate price growth.
Erkan, a former Wall Street banker appointed after Erdoğan’s re-election, emphasized the central bank’s holistic approach to monetary policy. In addition to increasing interest rates, the bank will implement measures to restrict bank lending and cool down overheating demand. As part of this strategy, the monthly limit on commercial loan growth has already been reduced.
Erkan, who specializes in mathematical risk management models, highlighted the importance of quantitative analysis in the central bank’s decision-making process.
She also asserted that the central bank would maintain complete independence from government influence and base its decisions solely on scientific principles.
Erdoğan, a long-time advocate for low borrowing costs, has historically exerted significant control over monetary policy by demanding rate cuts. In 2021, he dismissed a previous central bank governor following substantial interest rate increases.
Responding to concerns about her flexibility in raising rates, Erkan emphasized the need for careful and precise steps.
Tim Ash, an emerging markets strategist at BlueBay Asset Management, believes that the central bank aims to avoid destabilizing the system and prefers a learning and calibrated approach.
However, he cautioned that the market does not believe that Finance Minister Mehmet Şimşek and Erkan have the authority to take whatever measures necessary to fight inflation, particularly regarding policy rates, as Erdoğan still holds ultimate decision-making power.
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