Interest rates

IMF calls on Turkey to raise interest rates

The International Monetary Fund today announced its latest findings on Turkey and urged the country’s central bank to raise interest rates.

The US-based financial institution sent a delegation to Ankara and Istanbul in October, meeting people from the private and public sectors. The IMF said that Inflation in Turkey and local currency depreciation could be mitigated by higher interest rates.

“The policy rate cuts at the end of 2021 added to existing vulnerabilities and were followed by a depreciation of the pound and high inflation,” the IMF said in a press release. “The mission recommended early hikes in policy rates accompanied by measures to strengthen central bank independence. Such measures would help reduce inflation more sustainably.

The IMF’s outlook was not entirely negative. The report also states that Turkey’s economy has recovered well from the COVID-19 pandemic, stating that “growth has rebounded strongly from the initial impact of the pandemic, reflecting a buoyant private sector and stimulus policies.” .

Why is this important: Inflation has soared in Turkey all year. Inflation reached 85.5% this month, although some observers believe the government is hiding the true level of price increases. Food prices, in particular, are on the rise.

Many central banks in the region have been raise interest rates this year, which is the conventional strategy that financial institutions deploy to reduce inflation. Turkish President Recep Tayyip Erdogan, however, has an unorthodox belief that lower interest rates lead to lower inflation. Erdogan specifically wants to lower rates so that exports can boost domestic economic growth.

In August, the Turkey’s central bank lowers rates from 14% to 13%. A month later, the bank lowered rates again at 12 %.

To make matters worse, the The Turkish lira has depreciated against the dollar considerably this year. One dollar was equivalent to about 13 lire at the beginning of the year. The current rate is around 18 lire to the dollar.

And after: The IMF will prepare a broader report on the Turkish economy in a few weeks, according to the statement.

The IMF is not the only institution with a bearish view of Turkey. In June, the rating agency S&P Global called Turkey vulnerable to a liquidity crisis.