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Recep Tayyip Erdogan’s unorthodox policy of promoting low interest rates to combat inflation and generate economic growth has been strongly criticized by the international economic community. However, he decided to do a 180-degree turn, which did not quite convince the market.
A decade ago, when Reyep Tayipp Erdogan was first sworn in as Turkey’s president, one dollar cost two Turkish liras. This Thursday, June 22, after losing 4% in the day and renewing a historical maximum, it costs 24 liras.
Those who closely follow Turkish economic policy attribute it to the unorthodox strategies of Erdogan, the recently re-elected president of a country questioned by the lack of independence of the Central Bank.
The president has promoted lax interest rates, contrary to the general world consensus, which has tightened access to credit to control inflation. Yet the nation continues to suffer from one of the highest annual inflation rates in the world.
But that policy, judging by today’s decision by the Central Bank, could have its days numbered. The Issuer, now run by a woman appointed by Erdogan, raised its reference rate by 650 basis points to 15% and said it would go “further.”
Although post-election monetary tightening fell short of expectations and plunged the value of the lira against the dollar, it did set a new course after years of monetary easing.
The reference rate had been reduced from 19% to 8.5% at the end of 2021 and today it returns to 15% in a single and aggressive movement.
Annual inflation in Turkey was just below 40% in May, after hitting a 24-year high above 85% in October last year. However, the Central Bank indicated that the increase in prices will be subject to more pressure.
With Reuters and AP
