The Turkish Central Bank (TCMB) has recently raised its key interest rate rather unexpectedly by 200 bp to 10.25%. The move was explicitly justified by the risks to the inflation outlook and the need to keep inflation expectations in check.
The guardians of the currency had long been reluctant to take this step in the form of an increase in the official key interest rate, thus completing a move away from „more restrictive monetary policy through the back door“, which had been overdue for weeks. By mid-August at the latest, the central bank had arranged the supply of liquidity in such a way that commercial banks were forced into more expensive refinancing facilities. In this way, the guardians of the currency were able to increase the average refinancing costs of the financial institutions and thus provide a restrictive impulse to the Turkish money markets. At the same time, however, monetary policy transparency and credibility were lost, as the hesitant attitude was interpreted as a kneeling before President Erdogan. He had also recently spoken out loudly in favor of lower interest rates.
The increase in the official key interest rate is a correct and important measure, especially in view of the tarnished reputation of the TCMB. However, it remains questionable whether it is sufficient to counteract the increased price pressure and the continuing weakness of the lira in the long term. On the one hand, doubts seem to be justified with regard to the real official key interest rate, which remains in negative territory even after the interest rate increase. On the other hand, the excessively hesitant stance of the central bank is not the only reason for the dwindling confidence of investors and the accompanying slide in the Turkish national currency. On the contrary, President Erdogan’s harsh foreign policy rhetoric towards the EU in the dispute over possible natural gas deposits in the Mediterranean recently caused uncertainty and even speculation about an imminent military conflict. The recent escalation of tensions between Armenia and Azerbaijan is also of little help, since Turkey is considered Azerbaijan’s protective power. Without an end to the foreign policy storming, it will probably be difficult for the lira to stabilize permanently or even herald a sustained recovery.