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Financial analysts at Turkey’s central bank meeting on Thursday expect monetary policymakers to take a middle ground between rate hikes amid a sharp divide in global investment bank expectations for a rate hike in Turkey. President Erdogan said interest rates will be between 7% and 13% and take the approach of gradual policy changes, especially since the inflation rate has almost halved since the end of last year.
“Goldman Sachs” bank expects Turkey’s central bank to raise official interest rates to 40% from the current 8.5% at its meeting on June 22, the first increase since March 2021, while Bank of America is expected to raise rates 25%, and warned that interest rates may be cut or fixed, Deutsche Bank is expected to raise interest rates by 11.5%, and Societe Generale will increase interest rates by 6.5%.
JPMorgan also expects a rate hike of 16.5% to 25% this month and to 30% by the end of the year.
Turkish President Recep Tayyip Erdogan hinted in mid-June that he would allow his new economy team to raise interest rates to fight inflation and stabilize the lira, a very different move from what he has done. These expectations have since been contradicted by conventional monetary policy. Go for the long term by lowering interest rates.
After winning a new presidential term in late May last year, Erdogan appointed former Merrill Lynch economist Mohammad Simsek as finance minister and Hafiza Gaya, a former Wall Street finance official, as central bank governor.
Turkey’s annual inflation rate hit 85% last year, the highest in nearly a quarter of a century, but fell below 40% in May for the first time in 16 months. The lira has fallen 16% since the May 28 election, as Turkey’s central bank’s monthly survey last week showed market participants raised expectations for a seven-day repo rate hike to 17% from 8.5% at its June 22 meeting doubled.
Commitment to a more rational and pragmatic monetary policy
Mazen Salhab, chief market strategist at BDSwiss MENA, told Sky News Arab Economics: “Turkey’s interest rates have been falling since President Erdogan came to power two decades ago. In 2004, interest rates were close to 20%. It is currently stable at 8.5%. Now, with the appointment of the new governor of the Central Bank of Turkey and the promise of a more reasonable and realistic monetary policy by the new Finance Minister Simsek, interest rates can be expected to gradually rise.
Sahab wonders: “How and why did interest rise in the first place? Could this be the beginning of the end for President Erdogan’s unconventional policies, which he has followed for two decades and which he said a few weeks ago after his election? ,will continue?”
Erdogan Hypothesis
The Chief Market Strategist at BDSwiss MENA answered these questions, saying: “President Erdogan’s assumption is this: lower interest rates will help stimulate Turkish employers and companies, while the Turkish lira will remain weak will help Turkey exports and increase Turkey’s export level.” The level of competition for its goods (in lira). Turkey will depreciate -27% against the US dollar by 2023, over -36% for the whole year, and nearly 400% in just five years).
Sahab said: “The fall in the lira has pushed Turkey’s inflation rate to a record 40 percent, but it was at 85.5 percent at the end of last year. The idea that President Erdogan wants is based on the assumption that business levels, people A return to work and higher consumption will keep Turkey out of recession, while rising incomes, employment and wages will make consumers less vulnerable to inflation.
Sahab insists that the political aspects of President Erdogan’s economic policies can never be ignored, bringing him millions of voters from the owners of companies and businesses whose businesses Thriving under the influence of cheap cash.
active decision-making
The chief market strategist of “BDSwiss MENA” believes that “Turkey’s Ministry of Labor announced on Tuesday that it will increase the minimum wage by 34% to 483 US dollars (11,402 Turkish lira) per month to deal with high inflation and improve purchasing power. This is a political move. “Statement that because such a decision would send inflation sharply higher, we would be back in the same cycle that the major economies entered.
On the other hand, such an announcement could be a pre-emptive decision ahead of Thursday’s rate hike, meaning a quick rate hike to 25% (some say 30%), as JPMorgan expects, under yesterday’s decision, would put the Salary increases became a matter of course. The decision to raise interest rates came and contained the expected rise in inflation, and while we believe President Erdogan will not risk a quick rate move, the central bank’s decision on Thursday is likely to disappoint many,” Salhab said .
Expectations of gradual rate hikes
Salhab added, “Himsak, who is known as a friend of the market, will not risk raising interest rates significantly, at least for now, which means he will have to take a middle ground and raise rates no higher than The level of interest rates.” More than 15% and the gradual change of President Erdogan’s previous policies, especially since inflation has dropped to nearly half since the end of last year, if the interest rate is raised to a level of no more than 15%, the Turkish central bank will be able to Gradually raise interest rates again before reaching a more appropriate level, especially given that inflation is currently slowly declining.
It must be mentioned that between 2005 and 2019, inflation had been stable (no more than 15% or even lower), and the subsequent epidemic crisis caused Turkey’s inflation rate to rise to more than 80%, which makes us believe that BDSwiss MENA The chief market strategist said interest in Turkey will not reach record levels, or even gradual levels.
Tariq Al Rifai, executive director of the Kunlun Research Center in London, said: “The main reason for Turkey’s interest rate hike is to try to control high inflation and the collapsing lira. For several years in a row against the dollar, especially in recent months, with Its value deteriorated rapidly, but we also noticed that over time, there was a sharp decrease in the inflation rate, which is now falling, and this, although still high, is good for the Turkish economy.
With the Turkish central bank successfully controlling inflation, attempts to maintain the lira against the dollar have not been successful, which has forced it to support the lira by raising interest rates, but outside expectations Al-Rifai said that international investment banks will raise interest rates by 20% to 40%. The claims are a bit of an exaggeration and could not possibly be borne by the Turkish economy, he expects the central bank to raise rates between 7% and 13%, similar to what it did in 2018 when the lira fell sharply, suggesting that any increase in the lira would be difficult for the economy .
The executive director of the Kunlun Research Center said in an interview with the “Sky News Arabian Economics” website that the interest rate will be raised gradually after the first substantial interest rate hike on Thursday, but it will not reach the expected 40% level.
the market is waiting
Ali Hamoudi, CEO and Chief Investment Officer, economist and financial expert at ATA Global Horizons, said: “The Turkish economy has had a disastrous few years, with unconventional monetary policies leading to inflation rose to 40%, Turkey’s central bank is expected to raise interest rates at its upcoming meeting on Thursday, raising rates by 1,150 basis points to 20% from 8.5%, following President Recep Tayyip Erdogan’s ( Recep Tayyip Erdogan led to the current cost of living crisis for Turkish citizens and the economy.
Turkey’s central bank cut interest rates to 8.5% from 19% at the end of 2021, as Erdogan, a self-proclaimed rate “enemy,” pursued an unorthodox economic policy that prioritized growth, investment and exports.
“Everyone is waiting for the central bank’s decision on Thursday, so that the market can see the depth and reality of Turkey’s monetary policy returning to the traditional path and being independent of fiscal policy,” Hammodi said.
Turkish central bank decides to raise interest rates, lira continues to fall