Interest rate hike expected following appointment of new Turkish Central Bank governor

Higher foreign exchange prices could cause surge in inflation
Interest rate hike expected following appointment of new Turkish Central Bank governor

The Turkish lira plummeted to a historic low this week, indicating that Ankara is relinquishing control of the foreign exchange market as the country’s new treasury and finance minister, Mehmet Simsek, promised a return to sensible economic management. Following his appointment of Simsek last week, President Recep Tayyip Erdogan replaced the Central Bank governor on June 9, with raising interest rates expected to be the next crucial move. These actions are viewed as a sign that Erdogan will step back from his unconventional policies, which are widely blamed for Türkiye’s foreign currency crisis and cost-of-living issues, after winning re-election on May 28.

Read more: Türkiye’s lira hits record: Can it afford a return to an interest rate cut policies?

Simsek, a former finance minister, and deputy prime minister under Erdogan from 2009 to 2018, is well-respected among international investors, whom Türkiye desperately needs to attract to alleviate its economic problems.

Hafize Gaye Erkan, a former senior executive at First Republic Bank and Goldman Sachs in the United States, has taken over as head of the Central Bank, making her the first woman to hold the position. Sahap Kavcioglu, an Erdogan loyalist who followed the president’s controversial rate-cutting push, was appointed head of Türkiye’s banking regulator, prompting some observers to question how much independence Simsek will have in reshaping economic entities and policies.

However, the necessary adjustments come with some side effects. Türkiye’s economy relies heavily on imported inputs, particularly energy, and higher foreign exchange prices would result in increased costs and, as a result, a surge in consumer inflation. The possibility of demand plummeting due to austerity measures causing the economy to contract raises the specter of stagflation, an economic stagnation accompanied by high inflation.

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