News Analysis: Is Türkiye's monetary tightening nearing its end?

0 Comment(s)Print E-mail Xinhua, December 8, 2023
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by Burak Akinci

ANKARA, Dec. 8 (Xinhua) -- Türkiye started a monetary policy reversal six months ago by a sharp increase in interest rates to curb double-digit inflation, a tightening that experts say will soon to come to an end.

Türkiye's central bank has tightened its benchmark policy rate for six straight months after President Recep Tayyip Erdogan reshuffled his cabinet and appointed a new economic team of technocrats following the May elections.

The new administration reversed the years-long easing cycle and embraced more conventional economic policies.

To fight stubborn inflation, the policy rate was aggressively hiked to 40 percent from 8.5 percent since June.

Inflation in Türkiye showed a 62-percent year-on-year rise in November, the highest level in 2023, according to the official statistics released on Monday.

Analysts believe that this tightening cycle is coming to an end as the monetary policy committee of the central bank will convene on December 21 to make a new decision on interest rates.

"It is likely that the committee will approve one more rate increase before waiting for the monetary tightening to take effect," said Senol Babuscu, a finance professor at Baskent University in Ankara.

An increase of 250 basis points is anticipated, after which the policy rate is expected to remain stable throughout 2024, unless consumer prices decline, he noted.

Babuscu said the current level of monetary tightening is quite close to the level needed to set the disinflation course and the pace of monetary tightening is expected to slow down.

Emre Alkin, a finance professor from Istanbul's Topkapi University, said that he expects one more interest rate hike in December before the middle of the next year.

He said in his blog that even with aggressive rate hikes, inflation remains high. He attributed the high inflation rates to several years of unconventional monetary policies.

Since 2002, Türkiye's economy has grown significantly under Erdogan's leadership, first as prime minister and then as president.

But since a currency meltdown in 2018 and subsequent financial woes triggered in 2021 by a policy of cutting interest rates despite soaring inflation, the country has faced a cost-of-living crisis and a weakened currency.

The rising cost of living and unrelenting inflation are causing millions of Turks to struggle to make ends meet. Inflation, particularly in food, has become a burden for consumers.

The Ankara government plans to hike the minimum wage this month as inflation is expected to peak in May 2024 to 70-75 percent before falling to 36 percent at the end of the year, according to official forecasts.

Hakan Kara, a former central bank chief economist and a scholar at Ankara's Bilkent University, said reforms should be implemented to support monetary policies.

"Structural problems cannot be solved with monetary instruments alone... In the fight against inflation, we need to focus on serious tax and spending reforms," Kara wrote on the social media platform X, formerly known as Twitter.

Experts warn that Türkiye's financial woes could get worse if the government increases public expenditure and welfare benefits before the local elections in March 2024, when Erdogan hopes to retake major cities Istanbul and Ankara that were lost to the opposition in 2019. Enditem

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