Turkey Has a Massively Important Decision to Make on January 24th

Weak currency, high inflation, but no rate hike?

In part one and two of this series, we’ve seen that Turkey (TUR) now stands reduced to junk status as far as its sovereign ratings are concerned. Further, its central bank’s decision not to hike its one week repo rate has only made things worse for the Turkish lira which is having a second successive calendar year of decline. Apart from the currency, inflation is also becoming a major worry for the nation.

A rate hike can put upward pressure on the domestic unit and cap the surge in inflation at the same time. So why did the central bank pass up the opportunity to raise rates and build confidence among those in the investment community?

Political pressure may have something to do with it.

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Rate hike not on government’s mind

In an interview with journalists while returning from Africa, President Recep Tayyip Erdoğan expressed his disapproval regarding the central bank’s use of a corridor for interest rates. A self-proclaimed “enemy” of interest rates, he was quoted by the Hurriyet newspaper as saying that “I am somebody who defends the ending of the floor and ceiling interest rate and just leaving the policy rate.”

Reaffirming his belief that it is high interest rates which are causing inflation, the President was quoted saying that “Raising interest rates influences the exchange rate and inflation in a negative way.”

According to reports by Reuters, he went on to state that “Interest rates are the cause, inflation is the result. Don’t look anywhere else. Not tomatoes, not pepper, it’s all claptrap. The main cause of this is interest rates.”

Independence of central bank in question

With the aforementioned strong and unorthodox views publicly stated by the President, it seems the nation’s central bank may not have as much independence on deciding on the path of monetary policy as it should.

By maintaining the status quo on its key policy rate in January, the central bank has arguably just reiterated the same. At a time when the Turkish lira is setting records for fresh lows and inflation is surging, the bank’s primary goal of price stability is far from reach.

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