The Turkish lira fell to a new record low on June 23 after the central bank raised interest rates by 6.5 percent yesterday, Portal reported.
The sharp rate hike, which reversed President Recep Tayyip Erdogan’s previously unorthodox monetary policy, fell short of market expectations and caused the lira to plunge 2.8 percent today.
At its early trading low, the lira was down 27 percent against the dollar year-to-date.
Turkey’s central bank raised its key interest rate by a whopping 6.5 percent to 15 percent on Thursday, June 22, in hopes of curbing inflation. Still, analysts had expected incoming central bank governor Hafize Gaye Erkan to hike interest rates to around 21 percent.
However, Erkan, a former Wall Street executive at Goldman Sachs and First Republic Bank, seemed poised to hike rates further going forward.
The central bank’s Monetary Policy Committee said monetary tightening “will be further tightened as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.”
The committee said it raised rates “to set the disinflation stance, anchor inflation expectations and control the deterioration in price behavior as quickly as possible.”
The rate hike marked a reversal of years of monetary easing. Erdogan cut interest rates to 8.5% from 19% in 2021 in hopes of boosting domestic production and exports, but his unorthodox policies pushed inflation in Turkey’s economy to record levels.
Annual inflation fell to 40 percent in May after hitting a 24-year high of over 85 percent in October last year.
Central bank governor Erkan was appointed by Erdogan after his election victory last month, and it’s unclear how much freedom she will have to make decisions independently of the Turkish president.
Another Western friend, economist and politician Mehmet Simsek, was also appointed finance minister after Erdogan’s election.
Although Ergodan managed to retain power for another five-year term, he was heavily criticized by voters for his recent mismanagement of the economy, leading to his recent policy change.
Portal noted that “some analysts have expressed doubts about Erdogan’s determination to abandon his unorthodox politics, citing examples of his earlier turns to orthodox politics, only to quickly change his mind.”