The repercussions of raising interest rates on the economic reality in Turkey, following the results of the presidential and parliamentary elections that resulted in the victory of President Recep Tayyip Erdoğan and the People's Alliance led by the Justice and Development Party, witnessed significant changes in monetary policy. These changes are closely related to high inflation and the depreciation of the local currency.
Economic challenges involve addressing the escalating inflation and the decline of the Turkish lira, issues that President Erdoğan pledged to tackle during his election campaign. Achieving economic stability and reducing unemployment rates are important priorities for the government and economic policymakers.
Since the nomination of the Turkish economist Mohammad Şimşek for the position of Minister of Finance, Western experts and many economists have anticipated changes in the course of monetary policy. Some expected significant changes such as raising interest rates and depreciating the Turkish lira.
These expectations increased with the appointment of Hafizha Arkan as the Governor of the Central Bank. Şimşek and Arkan are considered experts in the financial field due to their experience in major Western banks and financial institutions known for their strict monetary policies.
After the interest rate hike, there were expectations of an improvement in the Turkish lira exchange rate or at least no further decline. Hence, concerns about an unclear future phase began to arise. Considering the traditional interpretation of interest rate hikes, the following points can be summarized:
Since 2020, the Turkish economy has been characterized by increasing economic growth rates, while global and regional growth rates have been fragile. Turkey's growth increased, reaching 5.6% by the end of 2022, with an estimated 5% growth in the first quarter of 2023. However, there are concerns that the new monetary policy may lead to a decline in growth and an increase in unemployment rates.
Turkey's economy has been distinguished by its diversity and productivity, with continued commodity exports and increased revenues from tourism. While success is evident in these aspects, there are concerns that raising interest rates may lead to an increase in production costs, which could negatively affect commodity exports.
An increase in interest rates can lead to continued inflation by increasing costs for consumers. This represents a delicate balance between the positive and negative effects of tight monetary policy.
It appears that raising interest rates could have varied effects on the Turkish economy, with a need for a delicate balance between achieving economic stability and curbing inflation.
Theoretically, there will be two contradictory impacts on the Turkish stock market. Firstly, there will be a positive impact due to the depreciation of the local currency, which will encourage savers to invest in the stock market through stocks and bonds to protect the value of their savings from inflation. Secondly, there will be a negative impact as the interest rate hike will prompt stock market participants to turn to banks, where they can benefit from lucrative returns and avoid stock market risks.
The new monetary policy aimed at raising interest rates aims to attract foreign investors to government debt instruments and increase foreign exchange reserves to control the exchange rate. However, this choice is not guaranteed and has affected the economies of emerging countries, including Turkey, where hot money can flow in and out rapidly, leading to negative fluctuations in the exchange rate in the face of any changes in the global economy or better interest rates elsewhere.
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In conclusion, the period until the end of 2023 will be pivotal in understanding the trends of economic policy in Turkey and the impacts it will have on the country's economic and social aspects.
