Abrupt Turnaround in Economic Strategy
Turkey's central bank has signaled a major shift in policy, preparing to increase its policy rate by a whopping 1,150 basis points, according to a recent Reuters poll. This comes as a sharp reversal from the previous approach, where rate reductions under President Erdogan's administration led to a rising cost-of-living crisis.
Past Rate Cuts: A Trigger for Economic Chaos
The central bank previously cut its policy rate from 19% in late 2021 to 8.5% in line with Erdogan's unconventional economic policies aimed at boosting growth, investment, and exports. Erdogan, a self-declared "foe" of interest rates, had supported these reductions. However, these rate cuts, in the face of escalating inflation, triggered a currency crisis that further fueled inflation, hitting an 85.5% peak last year—a 24-year record.
A Change in Leadership Amid Economic Turmoil
Economic upheaval marked Erdogan's election to his third term last month. In response, Erdogan brought on board Mehmet Simsek, highly regarded in the financial markets, as finance minister, and appointed former Wall Street banker Hafize Gaye Erkan as the central bank governor. These appointments have sparked hopes of a shift away from Turkey's unconventional policies, which have seen the lira lose over 80% of its value since 2018.
Economists Predict the Highest Rate Hike Since Mid-2019
According to the median forecast from 15 economists participating in the Reuters poll, the one-week repo rate at the forthcoming Monetary Policy Committee meeting is expected to reach 20%. This anticipated increase marks the steepest climb since mid-2019 and the first hike since March 2021. However, the forecasts vary considerably, from 12.5% to 30%, as the central bank remains cryptic about its next steps.
Erdogan's Stance on Rate Hikes: A Cause for Market Jitters
Despite Erdogan's recent hint that he may permit rate hikes, his unchanged opinion on high borrowing costs causing inflation remains a concern for market watchers. The return of foreign investors is highly anticipated, but there's an air of caution given Erdogan's history of briefly embracing orthodox policies before making abrupt policy shifts.
Potential for Further Hikes in the Horizon
Almost all economists participating in the year-end policy rate poll forecast further hikes, with a median expectation of 30%, and estimates ranging between 18% and 35%. The central bank's rate decision will be announced at 1100 GMT on Thursday.
