The result of increase of inflation and foreign exchange: Increase of interests

The result of increase of inflation and foreign exchange: Increase of interests
Date: 22.9.2023 13:00

Despite the objections of almost all economic circles, the policy rate was 19 percent in August 2021, two years before the necessary conditions were created. It was first reduced to 18 and then to 14 in December 2021. In those days, the dollar was around 8 lira and the euro was around 10 lira.

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The inflation rate remained at around 20 percent annually. When inflation reached 3 digits and the exchange rate reached 30 liras, interest rates started to increase again.
While the Central Bank Monetary Policy Committee increased the policy rate by 5 points to 30 percent, the interest rate has increased by a total of 21.5 points in the last 4 months.


The interest rate cuts, which started in September 2021 with the claim that "interest is the cause, inflation is the result" and when inflation was at 19.58 percent, resulted in an explosion of inflation and exchange rate.
While inflation climbed to 85 percent within a few months, the dollar rose from 8.5 lira to 18 lira within a year.
The government, which insisted on the "interest is the cause, inflation is the result" theory, which had proven to be unsuccessful even before the May 14, 2023 elections, started to move in the opposite direction after the election.
The result of insisting on the wrong policy was high inflation and rapid impoverishment around the world.
The Central Bank of the Republic of Turkey (CBRT) Monetary Policy Committee (PPK) increased the one-week repo auction interest rate, which is the policy rate, by 500 basis points to 30 percent.
In the announcement made by the CBRT regarding interest rates, it was stated that the Board, convened under the chairmanship of Hafize Gaye Erkan, decided to increase the policy interest rate to 30 percent.
In the announcement, it was stated that the Board decided to continue the monetary tightening process in order to establish disinflation as soon as possible, anchor inflation expectations and control the deterioration in pricing behavior.
In the announcement, it was stated that inflation was above the forecast in July and August, and the following was noted:
“While the strong course of domestic demand and the rigidity in service prices continue, the increase in oil prices and the ongoing deterioration in inflation expectations create additional upward pressure on inflation. These factors indicate that inflation will remain close to the upper limit of the forecast range in the Inflation Report (Report) at the end of the year. "It has been evaluated that the cost-oriented pressures and tax regulations arising from wages and exchange rates that have been effective recently have had a significant impact on inflation and that the main trend of monthly inflation will begin to decline."


In the announcement, it was emphasized that the policy rate will be determined in a way that will reduce the main trend of inflation and provide the monetary and financial conditions that will bring inflation to the 5 percent target in the medium term.
Monetary tightening will be gradually strengthened when and to the extent necessary until a significant improvement in the inflation outlook is achieved.
In the announcement, it was noted that the Board is simplifying the existing micro and macroprudential framework in a way that will increase the functionality of market mechanisms and strengthen macro financial stability.


Despite the rhetoric of "how is it?" and the theory of "interest is the cause, inflation is the result", interest rates increased once again.
However, as recently as April, President Erdoğan said, "As long as this brother of yours is in power, interest rates cannot rise; interest rates in Turkey will constantly fall."
While it was said that the economy was on a rational basis after the election, it turned out that this rational basis was based on interest.
Interest rates increased by a total of 21.5 points in 4 consecutive months.
The expectation of "foreign financial institutions" and the markets is that the interest rate will increase by around 5 points in October.


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