The Central Bank of Turkey hiked up its repo rate for a one-week timeframe from 8.25 to 10.25% to support price stability and restore the procedure of disinflation. The decision was stated in a press release following the newest meeting of the Bank’s Monetary Policy board.
Since inflation grew sharply due to a quicker-than-anticipated economic rebound that a strong credit marketplace drove, the decision to control inflation expectations occurred.
The economic point of view is that growth will become more stable. Economic recovery will be more sustainable with smaller interest rates in the long term by making sure there is lower sovereign risk.
Obviously, the goal was to carry on with a process of disinflation after the lira crash two years ago. The spiraling value means new inflation depths are coming into the equation.
This rise in interest rates is a try to fight that spiral’s effects, although President Erdogan criticizes it.
This year alone, Lira ended up without 1/5 of its worth because of Erdogan’s economic growth policy at all costs. This seems to have caused dire economic consequences.
Turkish inflation is now around 12%. This means that real domestic interest rates remain negative since inflation is still significantly over foreign investors’ premium from Turkish stock investments.
This has led to foreign investors dumping Turkish stocks in numbers over $5 billion in the past 12 months alone.
In combination with the lack of tourism income due to Covid-19, the country may well face a balance-of-payments crisis. Public and private debt are flown, and Turkey imports more than it exports now.
Following the coronavirus spread in the second quarter of 2020, Turkey’s GDP saw a record 11 percent fall.
The decision of the Central Bank of Turkey seems to be the failure o the other strategies for hiking up lira values to have the effect policymakers wished for. Turkey’s foreign currency reserves are currently the biggest low of the past 20 years. Turks can only hope that this newest move will bring some stability to the lira before inflation becoming totally uncontrollable.