By 100 basis points, the Turkish Central Bank cut the interest rate, Thursday, from 19 to 18 percent, in the first step of its kind since the new governor of the bank, Shihab Kavcioglu, took office.
Soon, this was reflected in the exchange rate of the Turkish lira, as it fell to touch the 9-lira barrier against the dollar and then reached approximately 8.80, according to the data provided by the Doviz website.
And the Central Bank published a statement following the decision to cut, in which it said that demand factors that could be affected by monetary policy, core inflation developments, and the effects of supply shocks were analyzed.
And the statement continued: "In this context, it was concluded that there is a need to update the monetary policy position... and it was decided to reduce the interest rate."
Shihab Kavcioglu is considered one of the advocates of the policy of not raising the interest rate, which is the same trend that Turkish President Recep Tayyip Erdogan insists on, to the extent that he considered in previous statements that the interest rate is "the father and mother of all evil."
The government has been saying for months that it is moving according to a new economic policy, based on lowering the interest rate in order to combat inflation, which has reached "dangerous" levels.
And it announces that it is in the process of supporting investments in the country, in a move that may revive the economy, which suffers from several crises, exacerbated by the repercussions of the recent closure to prevent the spread of the Corona virus.
What is the relationship of interest to inflation?
Interest is a monetary policy tool within economic policy, and is used when the economy is in a recession (weak economic growth).
With the increase in unemployment indicators in the country, the interest rate is reduced, in order to stimulate aggregate demand and thus stimulate investment, economic growth and job opportunities.
And when there is inflation, i.e. a continuous rise in prices, the interest rate must be raised in order to curb the excess demand in the market, and then calm down prices and inflation.
According to the data of the "Turkish Statistics Authority", inflation in the country rose by 1.12 percent last August, and became 19.25 percent on an annual basis, after it reached 18.95 percent last July.
'hard choice'
The move taken by the Turkish Central Bank to cut the interest rate opened the door to wide discussion and controversy on social media.
It was noticed that after the decision was issued, the hashtag “#dolar” was issued on the Turkish trend list, on the “Twitter” networking site.
While some considered that the reduction would further deteriorate the exchange rate of the lira in the foreign exchange market, and thus collapse again, others saw that what the “Central” had done was useful in order to curb inflation rates and reduce the unemployment crisis in the country.
And between 2020 and 2021, the Turkish economy went through difficult conditions, against the background of several political, military and economic developments and events, which greatly affected the exchange rate of the lira, as well as exports.
In addition to the political and military factors that were associated with Turkey's policies in several regional files, the Corona crisis had the most prominent role in terms of negative repercussions on the economy, after it caused a significant decrease in the number of tourists.
Surprising decisions issued by Erdogan also increased pressure on the Turkish lira, most notably the series of dismissals that affected the post of central bank governor, up to the appointment of Shihab Kavcioglu, last March.
"The issue of the interest rate was raised more than a month ago, and there were expectations that it would be reduced to a level of less than 18 percent," said Dr. Firas Shabo, professor of financial management at Basaksehir University.
The economist adds to Al-Hurra: "The depreciation is now limited, but the Turkish lira has shown a reaction more than the value of the decline. There is a big difference in the exchange rate at the moment."
Shabo expects the Central Bank to continue its interest rate cut policy during the next stage, but "in a flexible, cautious and deliberate manner", in a move to meet the government's direction on the one hand, and to achieve greater growth rates on the other.
During the past six months, the lira was in a stage of stability, as the exchange rate remained between 8.4 and 8.5 pounds to the dollar.
Accordingly, the Central Bank has moved to reduce the interest rate now, based on what the previous conditions witnessed, according to the economist.
Erdogan has previously announced that the government's focus in the next stage will be on foreign investments, explaining that he is determined to "make Turkey a center for attracting local and international investors, with low risks, high confidence and satisfactory profits."
In addition, the Turkish president said, at the beginning of this year: "Everyone will see that when the investment is done to the fullest, we will rise to the ranks of the countries that provide the highest percentage of safe profits."
Conservative switch
Looking at the interest rate developments in Turkey since 2020 so far, two contradictory behaviors can be observed, the first by former Finance Minister Berat Albayrak and former Central Bank Governor Murat Oysal, and the second by former Governor Naji Aghbal and Finance Minister Lutfi Alwan, who took over following the resignation of Albayrak .
From January 2020 to May, the interest rate witnessed a decrease from 11.25 to 8.25, to remain at this rate until September, to rise again to 10.25.
Then it rose to 17% in the last months of 2020 by Naji Aghbal, and then raised it in March 2021 to 19%, which prompted Erdogan to dismiss the latter and appoint Shihab Kavcioglu as his successor, who in turn maintained the 19% ratio. Before it starts now to reduce it in a limited way.
Kavcioglu had written in a pro-government newspaper, sharply criticizing his predecessor Aghbal's tendency to raise interest rates, and analysts stressed that the new central bank chief supports Erdogan's vision that raising interest rates leads to inflation.
Kavcioglu has become Erdogan's fourth central bank chief since July 2019, and he must now meet the president's goal of lowering the annual interest rate to five percent by the time of the next elections in 2023.
0 Comments