Another tactical stop by the Turkish central bank. It kept its main interest rate unchanged at 14% for the second consecutive month, in line with economists’ expectations, a decision aimed at containing inflation which approached 50% in a year in January, the peak since 2002, interrupting the government’s policy of rate cuts that triggered a slump in the lira last year. Indeed, under pressure from President Recep Tayyip Erdogan, who believes, contrary to conventional economic theories, that lower interest rates can reduce inflation by encouraging economic growth, the central bank last year lowered the policy rate by four. times, taking it from 19% to 14%, moves that have caused the country’s currency to lose up to -45% in the
At the moment the dollar / lira exchange is worth 13.62 (+ 0.2%). “The lira continues to trade in a relatively tight range after the central bank left the repo rate unchanged at 14% for the second consecutive meeting. A series of rate cuts late last year triggered a collapse of the currency and sent inflation skyrocketing – reaching 48.7% in January – when President Erdogan imposed his unconventional beliefs on the independent central bank. Currency stability came when the central bank paused its cycle What the result will be is not known, given how the central bank has behaved under the “guidance” of Governor Sahap Kavcioglu “, said Craig Erlam, analyst at Oanda.
In a statement, the Turkish central bank today cited “growing geopolitical risks”. The reference to the Ukrainian crisis is clear. “This is a tactical stop,” economist Ugur Gurses commented, referring to the decision to stop interest rate cuts. “Because they saw the shock in the markets and the shock of inflation.” According to the expert, the government could refrain from further cutting interest rates until April or May, when Turkey hopes to benefit from a flow of foreign exchange brought by tourists along with the revenues of the new financial instrument set up by the government last year. .
Of course, the decision by the Turkish central bank to leave rates on hold since December has highlighted the contradictions in the government’s economic policies. “If they are sincere in their belief that rate cuts are disinflationary, there can be no better time for rate cuts,” said Selva Demiralp, professor of economics. After rejecting calls from economists and the Turkish business community to raise interest rates to control inflation, the Central Bank has been selling billions of dollars in foreign currency since December in an effort to stabilize the lira, helping to stop its decline. The government also sold $ 3 billion worth of Islamic bonds, or sukuk.
However, the rising cost of food, fuel and other essentials is contributing to a wave of public discontent that is adding to the pressure on the government. In recent weeks, there have been numerous street protests against high electricity bills that led Erdogan to announce an aid package this week. Trade union unrest is also on the rise with at least 65 strikes between January 6 and February 14.
Rising energy prices and the threat of a Russian invasion of Ukraine have added to concerns over the Turkish economy. The war in Ukraine would further raise the price of oil and gas and could deprive Turkey of the expected revenue from Russian and Ukrainian tourists. Central banks around the world have raised interest rates in recent months to keep inflation in check, but Turkey has been bucking the trend due to pressure from Erdogan who has sacked some central bank governors in recent years and senior officials who oppose his distorted view. (All rights reserved)
