Monetary and economic policy under new auspices in Turkey?


Does the weekend of November 7, 2020 really mark a structural change in Turkish monetary and economic policy? At least the hope that is currently prevailing on the financial markets is justified. Last week was triggered by statements made by none other than Turkish President Erdogan - the man who in recent years never tired of railing against foreign speculators and who had increasingly damaged confidence in the national currency with measures to curtail central bank independence in combination with his unorthodox demand for lower key interest rates to reduce price pressure.


Since the dismissal of central bank chairman Uysal and the resignation of Finance Minister Albayrak, completely new tones have been heard from Ankara. President Erdogan announced no less than a period of economic and judicial reform. The head of state is not only holding back with criticism of the central bank, but is also giving it the investors' long awaited backing for the "bitter pill" of a more restrictive monetary policy. According to Erdogan, the top priority is to bring the inflation rate "as soon as possible into the single-digit range" (October figure: questionable 11.9% y/y). Even meetings with international investors were announced.


The first test for the announced new beginning will take place on Thursday in the course of the interest rate decision of the Turkish central bank. An increase in the official key interest rate from the current 10.25% to 15% is already possible if Naci Agbal, the new man at the head of the central bank, wants to make an impression on the currency market. A small-scale increase would run the risk of disappointing investors. The recent appreciation of the lira in the order of more than 10% against the euro and the US dollar could then be quickly resolved.


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