After the decision of the Turkish Central Bank, what happens to read it? And what does Erdogan want?

By 100 basis points, the Turkish central bank cut the interest rate on Thursday from 19 to 18%, in the first such step since the bank’s new governor, Shihab Kavcioglu, took office.

Soon this was reflected in the exchange rate of the Turkish lira, which fell to touch the barrier of 9 pounds against the dollar and then hit around 8.80, according to data provided by the Doviz site.

And the Central Bank issued a statement following the decision to cut, in which it said demand factors that could be affected by monetary policy, changes in core inflation and the effects of shocks supply, and the effects of supply shocks, were analyzed.

The statement continued: “Against this background, it was concluded that there was a need to update the monetary policy position… and it was decided to reduce the interest rate.”

Shihab Kavcioglu is seen as one of the proponents of the policy of no raising the interest rate, which is the same trend that Turkish President Recep Tayyip Erdogan insists on, as he considered in previous statements that the interest rate is “the father and mother of all evil.”

The government has said for months that it was following a new economic policy, based on lowering interest rates in order to fight inflation, which has reached “dangerous” levels.

And he announces that he is supporting investments in the country, in a move that could 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 recession (low 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 employment opportunities.

And when there is inflation, that is, a continuous rise in prices, the interest rate must be raised in order to curb excess demand in the market and then calm prices and inflation.

According to data from the “Turkish Statistics Authority”, inflation in the country rose 1.12% last August and rose to 19.25% on an annual basis, after reaching 18.95% in last july.

‘difficult choice’

The decision by the Turkish Central Bank to lower the interest rate has opened the door to wide discussion and controversy on social media.

It was noted that after the ruling was released, the hashtag “#dolar” was posted on the Turkish Trend List, on the “Twitter” networking site.

While some believed that the cut would further deteriorate the lira’s exchange rate in the foreign exchange market, and thus collapse again, others saw that what the “Centrale” had done was helpful in curbing the lira’s rates. inflation and reduce the unemployment crisis in the country.

And between 2020 and 2021, the Turkish economy went through difficult conditions, against the backdrop of several political, military and economic developments and events, which strongly affected the exchange rate of the lira, as well as exports.

Besides the political and military factors associated with Turkey’s policies in several regional issues, the Corona crisis had the most important role in terms of negative repercussions on the economy, having caused a significant decrease in the number of tourists.

Surprising decisions by Erdogan have also increased the pressure on the Turkish lira, including the series of layoffs that affected the post of governor of the central bank, until the appointment of Shihab Kavcioglu, last March.

“The issue of the interest rate was raised over a month ago, and it was expected to be cut below 18%,” 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 more reaction than the value of the decline. There is a big difference in the exchange rate right now.”

Shabo expects the Central Bank to continue its policy of lowering interest rates in the next phase, but “in a flexible, cautious and deliberate manner”, with the aim of responding to the direction of the government. ‘on the one hand, and to achieve higher growth rates on the other. other.

Over the past six months, the lira has been in a stable phase, with the exchange rate remaining between 8.4 and 8.5 pounds to the dollar.

As a result, the Central Bank has decided to cut the interest rate now, based on what previous conditions experienced, according to the economist.

Erdogan previously announced that the government would focus in the next step on foreign investments, explaining that he was 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 earlier this year: “Everyone will see that when the investment is made to the maximum, we will rise to the ranks of the countries that provide the highest percentage of safe profits”.

Conservative switch

Looking at the development of interest rates in Turkey since 2020 so far, two contradictory behaviors can be observed, the first of the former Minister of Finance Berat Albayrak and the former Governor of the Central Bank Murat Oysal, and the second from former Governor Naji Aghbal and Finance Minister Lutfi Alwan, who succeeded Albayrak’s resignation.

From January 2020 to May, the interest rate declined from 11.25 to 8.25, to stay at that rate until September, to rise to 10.25.

Then it rose to 17% in the last months of 2020 by Naji Aghbal, to increase it in March 2021 to 19%, which pushed Erdogan to dismiss the latter and to appoint Shihab Kavcioglu as his successor, who in turn has maintained the ratio of 19%, Avant it is now starting to reduce it in a limited way.

Kavcioglu had written in a pro-government newspaper, strongly criticizing his predecessor Aghbal’s tendency to raise interest rates, and analysts pointed out that the new central bank chief supported Erdogan’s view that the increase of interest rates leads to inflation.

Kavcioglu has become the fourth head of Erdogan’s central bank since July 2019, and he must now meet the president’s goal of lowering the annual interest rate to 5% by the next election in 2023.