The Central Bank of Türkiye (TCMB) implemented a predictable yet substantial measure by increasing its key interest rate by 20-year high 5 percentage points. As inflation continues to afflict Turkey, the new rate will be raised from 25 percent to 30 percent. This decision aligns with the ongoing efforts of President Recep Tayyip Erdogan’s administration to pursue more conventional economic policies.
By raising its policy rate to 30 percent, TCMB has emphasized its commitment to implementing a “monetary tightening process” aimed at curbing skyrocketing inflation and maintaining price stability. The bank’s statement noted that the inflation rate for July and August exceeded expectations, reaching 58.94 percent last month.
For quite some time, Erdogan has advocated the notion that reducing interest rates is an effective strategy to combat inflation, which contradicts conventional economic wisdom. Succumbing to Erdogan’s influence, the Turkish Central Bank commenced a series of interest rate cuts in late 2021.
Year to date, the Turkish lira has experienced a significant decline of 30 percent against the U.S. dollar, and over the past five years, it has witnessed a staggering depreciation of 78 percent in relation to the greenback.
The U.S. Federal Reserve recently decided to keep its interest rates unchanged. Following this decision, TCMB, the Central Bank of Türkiye, has made its own move. The Turkish central bank’s decision occurred a day after the Fed meeting. It stands in contrast to the Fed’s decision and signifies a focus on monetary tightening. The Fed, on the other hand, is anticipated to raise rates once more by the end of the year and implement stricter monetary policies until 2024, surpassing previous expectations.
This month, JPMorgan has revised its year-end inflation forecast for Türkiye following the release of higher-than-expected August inflation data. The Wall Street bank now predicts a year-end inflation rate of 65 percent, up from the previous estimate of 62 percent. Additionally, the annual rate is expected to reach its peak at 73 percent in May 2024. JPMorgan also sees potential upside risks to its year-end policy rate forecast, which remains at 35 percent. The bank, however, foresees the central bank’s key interest rate to reach 45 percent by the end of next year. This projection is higher than the previous estimate of 40 percent.
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