Until Inflation Falls, Turkey Will Keep Tightening Monetary Policy

(CTN News) – In an inflation announcement made by the Central Bank of the Republic of Turkey (CBRT) on Monday, it was confirmed that the monetary tightening that began last month with a sharp rise in interest rates is likely to continue until there is a significant improvement in the inflation outlook.

As the minutes of the central bank’s policy meeting on June 22 indicate, “the monetary tightening process is expected to continue until a significant improvement in the inflation outlook is achieved,” according to the minutes of the central bank wherein a 650 basis point hike to 15% was made to the main interest rate.

It is believed that the policy reversal is the start of a tightening process that will be initiated in order to establish disinflation as soon as possible, as reported by Daily Sabah.

According to the central bank, the deterioration in price stability poses a threat to macroeconomic stability and in particular financial stability, which is why the committee is implementing a monetary tightening process, in which the steps are gradually increased as and when necessary.

As part of the first policy meeting under the new governor, Hafize Gaye Erkan, the interest rate was raised.

Considering the inflation outlook and downside risks,

The committee concluded that the current monetary policy framework is far from achieving the 5% inflation target, given the current monetary policy framework.

Having said that, just over a month after President Tayyip Erdogan won re-election in a tight race, the country has begun embracing a more conventional economic policy after years in which interest rates were slashed despite soaring inflation even as interest rates were lowered.

It was the first step in a process to curb inflation that the bank said was the result of its U-turn after a two-year easing cycle.

The annual inflation rate was close to 40% in May, just a few months after it peaked at 85% in October last year, a 24-year high.

A record high of $9.19 billion was reached by the central bank’s net reserves during the week ending June 23 – its largest rise ever. It is the lowest level of reserves since the data began to be published in 2002, as reserves fell by -5.7 billion to $-5.7 billion in the week to June 2.

In spite of the central bank’s reserves having recovered since mid-June, state banks are still selling dollars to meet demand from maturing lira deposit accounts known as KKM that are maturing.

In late 2021, Erdogan’s government introduced a scheme called KKM to stem a historic currency crash that was largely caused by his economic programme of cutting interest rates in an effort to stoke growth, exports and investment.

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