TCMB surprises markets with sharp interest rate, signaling shift in Erdoğan's economic policy

Shafaq News / The Turkish Central Bank (TCMB) has decided to raise interest rates to 25%, marking an unexpected shift in President Recep Tayyip Erdoğan's unconventional economic policy adopted after his victory in the presidential elections last May.

The Monetary Policy Committee of TCMB announced in its recent meeting a hike in interest rates to 25%. This increase, amounting to 7.5 percentage points, follows a 2.5%increase in the previous month.

Most economists anticipated a rate hike to 20% from the previous rate of 17.5%.

The Turkish lira surged by about 1.5% against the dollar, reaching 26.8₺ per dollar, following TCMB's decision.

In previous meetings held in May, April, March, January, and December of last year, TCMB maintained interest rates without changes. This followed the conclusion of the easing cycle that President Erdoğan advocated by lowering interest rates to below 10% despite rising inflation.

However, in mid-June, he hinted at allowing his new economic team to raise interest rates to combat inflation and stabilize the lira exchange rate. This marked a departure from his long-standing unconventional monetary policy of rate cuts.

Consequently, TCMB shifted towards a monetary tightening stance. Interest rates were raised from 8.50% to 15% in the June meeting, followed by another increase to 17.50% in July.

Furthermore, on Sunday, TCMB announced measures aimed at phasing out a program that converted foreign currency deposits into lira-denominated deposits protected from exchange rate fluctuations. TCMB also directed commercial banks to increase the required reserve ratios to safeguard foreign currency deposits.

Around two years ago, Turkey encouraged its citizens to open lira-denominated accounts to shield them from exchange rate volatility, thereby supporting the local currency. Estimates suggest that TCMB incurred up to $11 billion in the past two months to cover the costs of the lira's exchange rate deterioration.

It is noteworthy that following his re-election at the end of May, Erdoğan appointed former Merrill Lynch economist Mehmet Şimşek as the Minister of Finance and the former Wall Street executive Hafize Gaye Erkan as TCMB’s chief executive, signaling a significant change in the country's economic leadership.