Turkey’s central bank delivered an interest-rate hike that was significantly smaller than expected by most economists, a sign that policymakers will favor a gradual transition from an era of ultra-cheap money.
(Bloomberg) — Turkey’s central bank delivered an interest-rate hike that was significantly smaller than expected by most economists, a sign that policymakers will favor a gradual transition from an era of ultra-cheap money.
In the first rate-setting meeting after Governor Hafize Gaye Erkan took over this month, the Monetary Policy Committee increased its benchmark to 15% from 8.5%. It was a surprise to the vast majority of economists surveyed by Bloomberg who had predicted a move to 20% or more.
The MPC said in a statement that monetary tightening will be carried out gradually, as needed.
The first rate hike in over two years is a turning point in Turkey’s departure from unconventional policies that are blamed for an exodus of foreign investors and allowing prices to spiral out of control.
But the decision also vindicates the skeptics who continued to question if President Recep Tayyip Erdogan — a self-described “enemy” of high interest rates who’s espoused the benefit of loose monetary policy for years — would give Erkan free rein.
“Investors will be disappointed and underwhelmed by what is delivered,” Paul Greer, a London-based portfolio manager at Fidelity International, said before the decision was announced. The caution shown so far suggests the “new economic team has somewhat limited political capital and influence to deliver fast and far-reaching reform and provide a much-needed boost of market credibility.”
Policy Reboot
Erdogan set the gears in motion toward a policy reset soon after emerging victorious from presidential elections last month.
In overhauling his economic team, Erdogan brought back ex-Merrill Lynch strategist Mehmet Simsek as finance minister and installed Erkan at the helm of the central bank.
Turkey’s first female central bank governor worked for nearly a decade at Goldman Sachs Group Inc. before spending almost eight years at failed US regional lender First Republic Bank.
Though the latest move was a surprise to much of the market, authorities tried to manage expectations ahead of the meeting.
A senior Turkish economic official, who asked not to be named because of the sensitivity of the issue, cautioned that the jumbo rate hikes that were being priced in by the market may not materialize on Thursday.
Simsek also signaled that he preferred a gradual shift to more “rational” policies to avoid the risk of a sudden adjustment. The minister also told the nation’s top business and banking executives last week that he wanted to tread carefully to avoid unwanted side-effects, suggesting he’s wary of raising the cost of money too sharply.
Still, the first rate hike was a lot smaller than what many investors had thought would be adequate to rein in consumer inflation that’s running at nearly eight times the official target of 5%.
Erdogan, who’s on his fifth central bank governor in four years, has maintained that lowering the cost of money will eventually result in slower and more stable inflation, a belief that goes against the core premise of major central banks around the world.
Earlier this month, the president appeared to give his new economy team the flexibility to act, saying he had “accepted” the measures they would take. In 2020, he allowed a brief return to conventional monetary policies, but ended up sacking then-Governor Naci Agbal for increasing rates too aggressively.
–With assistance from Joel Rinneby.
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