The Turkish lira falls as Erdogan’s policy shift fails to take effect

The Turkish lira fell to a new record low on June 23 after the central bank raised the interest rate yesterday by 6.5 percent, Reuters mentioned.

The sharp rise in interest rates, which upended the previous unconventional monetary policy of President Recep Tayyip Erdogan, fell short of market expectations, causing the lira to collapse by 2.8 percent today.

At its lowest levels in early trading, the lira has lost 27 percent against the dollar since the beginning of the year.

Turkey’s central bank raised its main interest rate by a full 6.5 percent to 15 percent on Thursday, June 22, hoping to tame inflation. However, analysts expected the new central bank governor, Hafiz Gay Erkan, to raise interest rates to nearly 21 percent.

Still, Erkan, a former Wall Street executive at Goldman Sachs and the First Republic, appears poised to raise interest rates in the future.

Central Bank Policy Committee He said Monetary tightening “will be reinforced as needed in a timely and gradual manner until a significant improvement in inflation expectations is achieved.”

The committee said it raised interest rates “to establish a path to combat inflation as early as possible, to establish inflation expectations, and to control the deterioration in pricing behaviour.”

The rate hike was a reversal of years of monetary easing. Erdogan cut interest rates to 8.5% from 19% in 2021 in hopes of spurring domestic production and exports, but his unorthodox policy has seen inflation in the Turkish economy accelerate to record levels.

The annual inflation rate fell to 40 percent in May after hitting a 24-year high of more than 85 percent in October last year.

Erdogan appointed Central Bank Chief Erkan after winning elections last month, and it is unclear how much freedom she will have to make decisions independent of the Turkish president.

Another friendly Western figure, the economist and politician, Mehmet Simsek, was also appointed Minister of Finance after Erdogan’s election.

Although Ergodan managed to hold on to power for another 5 years, he came under heavy criticism from the electorate for his recent mismanagement of the economy, which prompted his recent policy shift.

Reuters male that “some analysts have expressed doubts about Erdoğan’s commitment to abandoning his being unorthodox, citing examples of his past shifts in orthodox politics only to quickly change his mind.”