Economists: Turkey's Central Bank interest hike threats to living standards
The Central Bank of the Republic of Turkey (TCMB) announced a significant 500 basis point increase in the benchmark interest rate. Economists argue that despite the increase, more than the hike is needed to attract significant foreign capital inflows to Turkey. According to their warning, this could cause a decline in living standards, particularly for those with lower incomes.
Over the last five meetings, the Central Bank, led by Hafize Gaye Erkan, has consistently raised interest rates. This recent change has increased the policy rate from 30% to 35%. The Committee defended the increase by citing the need to combat inflation and address pricing disruptions.
Economist Professor Hayri Kozanoğlu voiced worries regarding the Central Bank's dilemma of combating inflation while risking economic stagnation. Beginning in early 2024, he foresees a significant economic slowdown, worsened by global events, like increased raw material and oil prices caused by the situation in Palestine. Kozanoglu expects inflation to rise partly because of challenges in attracting foreign investments at current interest rates.
Kozanoglu emphasized the social consequences of the rate hike, such as more non-performing loans and worsening living standards for low-income individuals. This is because of higher's ability to offset income drops through borrowing.
Professor Murat Birdal, a prominent economist, praised the Central Bank's realistic approach in recent reports, highlighting the contrast with past neglect of domestic challenges. Birdal noted that policy interest rates still need to be higher to make Turkish Lira deposits appealing, showing ongoing pressure on the currency and inflation.
Economist Musa Ceylan commented on the need for interest rates to exceed inflation to make Turkish Lira savings appealing. He warned that while reducing expenditures might lower inflation, it would inevitably lead to increased poverty. Ceylan expects the policy rate to reach 40% by the year's end, emphasizing the impact of these measures on household spending and the broader social consequences.