Die Zentralbank erhöhte den Zinssatz auf 50 Prozent: Warum ist die Entscheidung wichtig?

Prof. DR. Selva Demiralp
Faculty member of Koç University

During its meeting on March 21, the Central Bank of the Republic of Turkey (CBRT) raised the policy rate by 5 points to 50%.

The decision made shortly before the local elections is an important and strong signal step towards regaining the credibility that the Central Bank is trying to restore.

In my social media post the day before the decision, I said, „It was inevitable that the Central Bank, which had cornered the markets with the words ‚This is not possible‘, would raise interest rates tomorrow.“ „You cannot make an effort by being intimidated by tyranny.“

In response to this post, many people asked, „If the Central Bank could raise interest rates, why did it spend $20 billion last month?“

This question is likely a balanced and logical one, considering the market’s view that „TCMB cannot raise interest rates anyway.“

On the other hand, if we were to ask logical questions, we would first inquire, „If the Central Bank were allowed to raise interest rates, why was inflation increased to 65% in the period after September 2021? Despite low interest rates?“ Shouldn’t we start with that question?

I do not know the answer to why the Central Bank did not raise interest rates at an interim meeting without burning $20 billion in reserves.

But there are so many questions like these to which I do not know the answer!

I do not know why they do not raise interest rates early but spread them over time.

I do not know why there is still tightening with macroprudential measures, even though excess liquidity was largely drained by early March and the money transfer system is functioning properly. Because if it ultimately comes down to economic slowdown, wouldn’t it be more economical to utilize the signaling effect of policy interest?

Even though I do not know the answers to these and similar questions, I appreciate that there is a group that managed to convince the political administration of yesterday’s 5-point increase in a region where conducting monetary policy is quite challenging.

Why is the decision valuable?

At the inflation report meeting on February 8, Chairman Fatih Karahan presented a clear and rather restrictive roadmap that we are not accustomed to from the CBRT. While Karahan stated that an increase in seasonally adjusted monthly average inflation above 3% would endanger the year-end inflation assumption and that in this case they would not hesitate to take additional steps, he knew, of course, that he would be held accountable if he did not keep his promise. That made the message valuable.

If we adjust the February inflation data at the beginning of the month for seasonal effects, monthly goods inflation corresponds to 4% and service inflation to 6%. In other words: We see that the 3% path set by the CBRT after January was disrupted from the first month.

In this case, the ability of a new central bank chief to build credibility and keep his word, especially despite the upcoming elections, was a significant signaling prize.

The pressure on the exchange rate has increased since the beginning of the year. In the period from March 1 to 21 alone, the USD/TRY exchange rate lost 3.5% of its value.

The model we worked on with my colleagues Çem Çakmaklı and Sevcan Yeşiltaş from Koç University shows that the impact of the exchange rate on overall inflation has increased to about 50%.

This situation indicates that despite billions in foreign exchange sales in the first 20 days of March, there was an additional 1.5-point pressure on inflation.

An exchange rate loss can only be prevented by demonstrating that investments in foreign currencies are not profitable. This was the goal of the Central Bank in its decision yesterday.

Only with concrete steps can the Central Bank change its „impossible“ expectations and „tame“ the markets. In an environment where credibility has been tested, it was valuable for the Central Bank under the leadership of Fatih Karahan to stand by its word before the election and take this step.

Why is inflation still not decreasing?

The CBRT has left behind a very difficult legacy.

It is not easy to reduce the overall inflation, which has reached 67%, to the 36% indicated for the end of the year. Because it is becoming increasingly clear that inflation cannot be reduced „without compromises.“

If the Central Bank were to fully utilize its interest rate tool, it might be able to