Investors and analysts are awaiting the meeting of the Turkish Central Bank on June 22, as it is the first to come after Tayyip Recep Erdogan was re-elected president of Türkiye and appointed a new economic team that includes internationally respected figures. This has been interpreted as paving the way toward a return to traditional monetary policies.
Erdogan’s rule was defined by cuts in interest rates when the world was on an upward trajectory to combat inflation, with interest rates as the best tool to counter this scourge.
He sacked more than one governor of Türkiye’s central bank after they tried not to comply with his view that high interest rates were “the source of all evil.”
Under pressure from Erdogan, who describes himself as the “enemy” of interest rates, the central bank cut interest rates to 8.5 percent from 19 percent in 2021 to boost growth and investment.
But that caused a major collapse of the Turkish lira and pushed inflation to very high levels. This prompted the authorities to intervene directly in the foreign exchange markets, resorting to tens of billions of dollars in reserves to keep the lira stable for most of this year.
Read: Türkiye’s lira hits record: Can it afford return to interest rate cut policies?
This, in turn, caused a significant cut in the central bank’s net foreign currency reserves, which touched a record low of $4.4 billion last month.
Turkish Central bank- More freedom?
Things look set to change after Erdogan won a new five-year term and formed a new government that included Finance Minister Mehmet Şimşek, who promised to “implement rational policies.” He also appointed Hafidha Haya Erkan as governor of the Central Bank of Türkiye, the first woman to hold this position in Türkiye. Shimek and Erkan face the difficult task of alleviating the painful cost of living crisis and restoring investors’ confidence at home and abroad.
Days ago, Erdogan said he was giving his new economic team more freedom to change policies. Analysts saw it as a concession on his part that opened the way, at least briefly, to a shift away from unconventional measures over the years.
Erdoğan signaled his support for both Simçek and Erkan, but without giving up his preference for ultra-low interest rates, stressing that his move should not be seen as a “serious change” in his views.
“We accepted that our minister would take quick and comfortable steps with the Central Bank, and in this way, we announced our intention to reduce inflation to single digits,” he told a group of reporters during the return flight from Azerbaijan.
Hence, expectations of a significant rate hike at the next meeting have begun. A Reuters poll on Friday showed Türkiye’s central bank was expected to raise interest rates by 1,150 basis points from 8.5 percent to 20 percent.
Bloomberg reported that the Central Bank of Türkiye’s Monetary Policy Committee will raise the one-week repo rate to 17 percent from 8.5 percent, citing the median estimate in the central bank’s monthly survey published on Friday. That’s lower than the median estimate of 20 percent in a Bloomberg poll of ten economists.
JPMorgan said it expected Türkiye’s central bank to raise interest rates to 25 percent from 8.5 percent, adding that it could come with expectations of smaller increases in the future if needed.
In a note to clients, JPMorgan’s Nicolae Alexandro-Chaidskowich said, “We maintain our 30 percent interest rate forecast at the end of the year, with bullish potential.”
Analysts attribute this expected strong hike to bridging the gap between the central bank’s base interest rate (i.e., the one-week repo rate) and the average deposit rate.
The weighted average interest rate for deposits up to 3 months rose significantly to about 34 percent, the highest level in 20 years, according to Bloomberg data.
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