Governor of Turkey’s central bank, Hafize Gaye Erkan, in Ankara, July 27, 2023 (Turkish Central Bank Press Office/AFP/Archives/Handout)
The end of President Erdogan’s heterodox policy: the Turkish central bank once again raised its main key rate by five percentage points on Thursday, now set at 30%, in an attempt to stem rising inflation.
This rate, capped at 8.5% in June, has now reached a level unknown since 2003 in Turkey, a country in the grip of a severe economic crisis.
Recognizing that “inflation was higher than expected in July and August” due in particular to the surge in oil prices, the Turkish central bank announces further rate increases in the coming months, “until a significant improvement inflation outlook.
But this expected increase – the fourth in a row – is still considered insufficient by many: inflation accelerated to 58.9% over one year in August after falling to 38.2% in June, returning towards the peaks of October 2022 (85.5%), well beyond the level of rates granted to individuals.
“Very good decision on the part of the Turkish central bank. Let’s not forget that they have now increased rates by a cumulative amount of 2,150 basis points (since June, Editor’s note), even if with inflation (. ..) real interest rates remain very strongly negative,” underlined economist Timothy Ash of BlueBay Asset Management.
Turkish President Recep Tayyip during a press conference on the occasion of a G20 in New Delhi, September 10, 2023 (AFP/Archives/Money SHARMA)
However, such a sharp increase in key rates was science fiction just five months ago: President Recep Tayyip Erdogan, then campaigning for his re-election, continued to support lowering key rates, prioritizing growth and employment. to price stability.
The Turkish head of state, who contradicts classical economic theories that high interest rates promote inflation, has however changed his position in recent months, letting his new economic team return to more conventional policies since June. .
“We will bring inflation back to single digits with the help of a restrictive monetary policy,” he declared in early September, seeming to have recognized the need for further rate increases.
– Overheating –
Economists, however, continue to worry about the overheating of the Turkish economy, with current interest rates, still well below inflation, encouraging consumers to spend their money quickly.
“The Turkish economy is not slowing down as quickly as we thought a few months ago,” Liam Peach, an analyst at Capital Economics, wrote in mid-September. This same analyst judged Thursday that the key rate will reach “at least 35% at the end of the year”.
The Fitch rating agency raised its outlook on Turkey from “negative” to “stable” in early September, welcoming the return to a “more conventional and coherent policy”.
Fitch believes, however, that “uncertainty remains about the scale, longevity and success of policy adjustment to reduce inflation, in part due to political considerations.”
Turkish Economy Minister Mehmet Simsek, in Ankara on August 21, 2023 (AFP/Archives/Adem ALTAN)
Turkish Economy Minister Mehmet Simsek, whose appointment at the beginning of June was welcomed by investors, ruled out any rate cut by the second half of 2024.
But the Minister of Economy will have to deal with another major problem: Turkey’s finances are weighed down by a banking mechanism covering the depreciation of bank deposits in Turkish lira compared to the dollar, the euro or the British pound. .
The expected dismantling of this mechanism launched at the end of 2021 could encourage savers to convert their savings into foreign currencies and cause the Turkish lira to plunge further, which has already lost nearly 80% of its value in five years against the dollar.
Early Thursday afternoon (11:30 GMT), the currency was trading around 27 Turkish liras to the dollar, almost stable.
Economist Timothy Ash called this mechanism “a grenade placed in Mr. Simsek’s pocket by the outgoing team.”
© 2023 AFP
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