The limited and low level of interest rate increase will cause difficulties

The Central Bank of Turkey’s decision to raise interest rates by 650 basis points did not meet the predominantly expected of domestic and foreign economists. Economist Hakan Kara interpreted the limited and low level of interest rates, which were expected to be between 25% and 40%, as potentially causing significant difficulties in the future.

Economist Hakan Kara stated that keeping the interest rate at a limited and low level would cause significant difficulties in the future.

Hakan Kara, former chief economist of the Central Bank of the Republic of Turkey, stated in his announcement that the 30% depreciation experienced since May would contribute 15 percentage points to inflation between June and October.

In his statement on social media, Hakan Kara emphasized that keeping interest rates lower than they should be would lead to higher interest rates and a deeper recession in the future.

Kara’s comments are as follows:

“I feel the need to question the argument of ‘let’s go very soft on interest rates, let’s not shake the economy.’ Today, moving slowly requires more aggressive interest rate hikes in the future due to currency depreciation and inflation. This would mean the economy experiencing more difficulties in the future.”

Due to the loose monetary policy, any additional increase in exchange rates and inflation would lead to higher interest rates or more intense financial pressure in the medium term. The 30% depreciation since the beginning of May is expected to contribute approximately 15 percentage points to inflation between June and October.

If a monetary tightening had been implemented with better communication and at a higher intensity, keeping the increase in the exchange rate more limited (for example, around 20%), inflation would have been 5 percentage points lower by the end of the year. The level at which interest rates should have reached to curb inflation would also be 5 percentage points lower.

In summary, keeping interest rates lower than they should be today would mean enduring higher interest rates and a deeper recession in the future. In an economy where inflation is expected to exceed 50% by the end of the year, I’m not sure if those who applaud a policy rate of 15% are aware of the consequences.

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