Turkey’s central bank voted to hit pause on an easing cycle that started in September and saw the lira crash.
Turkey’s central bank has ended its latest policy-setting meeting by keeping interest rates unchanged, halting a cycle of cuts initiated last September that economists warned was plunging the country into a deep economic crisis and eroding confidence in the bank’s ability to control inflation.
The central bank on Thursday voted to keep its benchmark interest rate steady at 14 percent. The move was widely expected after a series of interest rate cuts late last year championed by Turkish President Recep Tayyip Erdogan lowered borrowing costs by 5 percentage points and triggered a run on the lira that saw the Turkish currency crash.
Erdogan insists lower borrowing costs tame inflation – a view that starkly opposes mainstream economic theory which holds that lowering interest rates feed inflationary pressures.
The bank said on Thursday that it decided to hold rates steady due to “increasing geopolitical risks”, in an apparent reference to ongoing tensions between Turkey and its NATO allies and Russia over Ukraine.
Inflation and credibility
Turks have been grappling with blistering price increases for goods and services, including essentials like food and fuel.
The central bank said it is continuing to work towards achieving its target inflation rate of 5 percent. It has a long way to go. Turkey’s official annualised inflation rate topped 36 percent in December – the highest level in nearly 20 years. Independent assessments have inflation running as high as 83 percent.
Before Thursday’s policy-setting meeting, Erdogan had signalled that central bank policymakers would likely hit pause on the recent easing cycle, saying that while he would still like to see interest rates go lower, he was now advocating for them to fall “gradually and without hurry”.
Erdogan has sacked three central bank chiefs over the past two years and has issued pink slips to other monetary policymakers – moves that damaged the credibility of the central bank in the eyes of foreign investors.
Late last year, Erdogan appointed Nureddin Nebati as finance minister. Nebati, a staunch supporter of what he has called Turkey’s unorthodox economic plan, has echoed promises by Erdogan that inflation will start coming down this year and enter single digits in 2023 when voters are scheduled to head to the polls for presidential and parliamentary elections.
But many economists in Turkey are forecasting that the official inflation rate will keep climbing to as high as 50 percent this year unless the central bank raises borrowing costs.
Erdogan has said Turkey is embroiled in an “economic war of independence” against global forces that are manipulating the Turkish lira exchange rate. The lira lost 44 percent of its value against the US dollar last year, falling as low as 18 lire to $1 in December.
It has regained some of its value since then after Turkey unveiled a scheme guaranteeing Turkish lira bank deposits.
Economists have questioned how the government would pay for that programme, given the central bank’s foreign reserves fell dramatically in recent months as it intervened in foreign exchange markets to shore up the lira.
This week, Turkey signed a three-year $5bn swap deal with the UAE, and Ankara is currently in talks with Azerbaijan for a $1bn foreign exchange lifeline from Baku as well. Turkey already has similar deals with Qatar, China, and South Korea, totalling about $23bn.
Still, while Turkey’s foreign exchange reserves stood at roughly $110bn earlier this month when liabilities are factored in, they are roughly negative $56bn – the lowest in 20 years.