Turkey’s smaller-than-expected rate hike comes as relief for banks(Al Monitor, June 24, 2023)

The sizeable but smaller-than-expected rate hike by Turkey’s Central Bank has come as a relief for banks, which had feared the fallout of a much more aggressive and abrupt increase under a new economic leadership pledging a return to “rational” management of the economy.

In a departure from President Recep Tayyip Erdogan’s unorthodox policy of cutting rates despite soaring inflation, the central bank raised its policy rate by 650 basis points to 15% on Thursday. The move came after Erdogan appointed a new governor, Hafize Gaye Erkan, and a new treasury and finance minister, Mehmet Simsek, in a bid to regain investor confidence and revive the flow of foreign capital to ease Turkey’s foreign exchange crunch. The hike, however, was smaller than most forecasts, with the bank’s policy rate still well below the nearly 40% inflation rate.

In announcing the decision, the central bank signaled a gradualist approach to further hikes down the road. “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,” the statement said.

The rate had been widely expected to be raised to 20% or more, with Goldman Sachs forecasting a drastic move to 40%.

The relatively soft transition to monetary tightening is believed to be dictated by political considerations, among others. After winning a third presidential term last month, Erdogan faces local elections in March 2024, hoping to wrestle Istanbul and other big cities back from the opposition. Hence, he needs to avoid a too-harsh economic climate ahead of the polls.

https://www.al-monitor.com/originals/2023/06/turkeys-smaller-expected-rate-hike-comes-relief-banks