Turkish Lira Plummets to Record Lows After Central Bank Raises Interest Rates
Central Bank Raises Interest Rates
The Turkish lira sank to new record lows after Turkey’s central bank raised the country’s benchmark interest rate by 650 basis points in a dramatic monetary policy reversal.
The central bank lifted its key interest rate by almost double, from 8.5% to 15% Thursday, marking the country’s first hike since March 2021. However, that was still below Reuters’ expectations of a hike to 21%.
Lira Plummets Further
The lira — which has been extending its plunge since President Recep Tayyip Erdogan’s reelection — was last trading at 24.97 against the greenback.
“[The lira] is tanking big time and probably will continue to do so as they attempt to play catch up,” said Steve Hanke, professor of applied economics at Johns Hopkins University, adding that the central bank decision is “a little bit behind the curve.”
More Hikes to Come
Newly appointed Governor Hafize Gaye Erkan hinted at more hikes until the inflation situation in the country improves.
“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” Erkan said in a statement Thursday.
Inflation Rate in Turkey
According to government statistics, the country’s annual inflation rate for May stood at 39.59%. Last October saw Turkey’s inflation rate soar to 85.51%.
Fiscal Policy and Exchange Rate Regime
Turkish Finance Minister Mehmet Simsek said that a predictable fiscal policy and free exchange rate regime will “ensure that the Turkish lira regains stability and becomes a reliable currency.”
However, Hanke said that these alone will not be sufficient.
“Monetary policy isn’t about interest rates. It’s about the growth and the quantity of money,” the professor said, adding that Turkey’s money supply is “growing way too fast” given how the year-over-year rate of increase in the money supply is about 50% per annum.
Goldman Sachs’ Analysis
Goldman Sachs said the rate hike suggests that, at least in the short term, the central bank “intends to stick to its unorthodox framework centered around macro prudential measures and quantity restrictions rather than rates-based access to TCMB liquidity to tighten policy.”
The analysts warned, however, that efforts focusing on these measures that stabilize and increase the resilience of Turkey’s financial system would be limited without a rates-based monetary policy stance.
The lira’s freefall had previously surpassed the investment bank’s three-month forecast within three days.
