EMMANUELLA NEEMA MURHULA

22118326

MONETARY POLICY IN TURKEY

The Monetary Policy Council of the Central Bank of the Republic of Turkey (Türkiye
Cumhuriyet Merkez Bankasi - TCMB) is in charge of implementing monetary policies. One of
the central bank goals is to keep the price stable. Stable price leads the economy to perform
efficiently and to maximum employment, moreover, all actors in the economic can improve their
business, consumption, and savings choices. The Central Bank of turkey operated as a joint stock
company since its implementation on 3 October 1931 to show its freedom and difference from
other public organizations. Unlike most other sophisticated economies, Turkey's central bank is
not independent of the government, making it challenging for it to handle the issue. TCMB has
experienced many challenges since 1931, counting high inflation rate, a big current account
shortage, and a falling currency

The 2001 financial crisis was the hardest and most severe crisis Turkey had ever encountered; it
was also a watershed moment in Turkey's political and economic history. Due to this turkey
adopted a floating exchange rate system and the inflation- targeting regime in accordance with
the main price stability goal stated earlier. Moreover, the Turkish central bank changed its
interest rate policy and shifted to the short-term interest. This new measurement adopted
influenced a structural revolution in the economy and cured the high inflation struggle Turkey
economy was going through prior the 2001 catastrophe. The disinflation process experienced
important triumph since the International Monetary Fund (IMF) accord and stability program
supporting open markets stopped the financial system and government finance from collapsing
completely. After worldwide concerns about the dotcom bubble and the effect of the 9/11 attacks
passed, financial stability was attained, and a new era of growth started in turkey. However, the
IMF program was flawed. It was very susceptible to portfolio outflows, implying that
unexpected outflow could pose a serious danger to economic activity and financial stability. As a
result, in 2007 the extension of IMF agreement was cancelled because the economy of turkey
became too dependent on the risk appetite of foreigner investors. Further, when the subprime
mortgage crisis hit the United States, Turkey's economic stability was put to the test, and
production fell significantly the following year.

 Low interest rate policy

The decline of Turkish socioeconomic metrics began in 2011 but became noticeable in 2013,
leading to apparent autocracy in 2016, becoming an economic crisis in March 2018 and a full-
fledged depression in 2020 as covid-19 struck economies worldwide. Throughout this lengthy
time of turmoil, the government has pursued a variety of economic policies, the majority of
which were incompatible with one another, and the frequent changes have proven difficult for
businesses and investors equally. However, all of the government's policies share two important
characteristics: they seek to encourage economic activity and keep the banking system
financially stable.

It has been established that interest rates is an important player in monetary policy, for instance
high inflation prompt central bank to raise interest rate to stabilize the economy. Moreover, when
countries expand quickly, central banks frequently raise interest rates to calm the economy. They
accomplish this by raising the cost of obtaining money, thereby reducing economic activity. By
contrast, in Turkey, the reverse has occurred. TCMB has maintained interest rates low, causing
the economy to spin out of control. Recep Tayyip Erdogan, the Turkish President, has refused to
increase interest rates, claiming that doing so would be detrimental to the business. Analysts and
opponents say his policies have harmed the lira and fueled inflation, powering a currency crisis.

In Theory, low interest rate will cause the currency to depreciate (making export more
competitive and import expensive), will cause inflationary stress, boost the economy growth,
make investment more desirable and make the cost of borrowing low for government. In short,
Low interest rates benefit debtors by encouraging them to spend more but it makes Saver. For
instance, Retirees may be able to survive off their assets. If interest rates decline, they will have
less disposable money and will most likely spend less. Lower interest rates will truly reduce the
income of many individuals if a nation has a large percentage of savers. The United Kingdom is
country of borrower, with significant amounts of mortgage debt. As a result, lowering interest
rate has a greater effect in the UK than in EU nations where a larger proportion of people rent
rather than purchase. On the one hand, low interest rates stimulate customer spending, so foreign
spending will increase. The present account will suffer as a result of this. However, Lower
interest, should cause the currency rate to fall. This increases the competitiveness of exports, and
if demand is reasonably elastic, the effect of a reduced exchange rate should help the current
account.

In 2022 the official inflation rate in Turkey reached 83.45 percent and the yearly CPI inflation
was 176 percent. The greatest number in 25 years, and it could reach triple figures if a fresh
currency shock occurs. The normal jobless rate was 10%, but it rises to 20% when discouraged
employees are factored in. Poverty is widespread, and with few options, the young population,
especially the best educated, is resolved to leave. To summarize the situation, long-term
development and prosperity will be difficult to accomplish, society is losing faith in the future,
and this has resulted in a rush of young people seeking to relocate to established countries.
International officials must consider the chance that Turkey will stay socially unpredictable in
the 2020s.

High inflation has been established like one of the big cause of Turkish devaluation spiral. It
reduces economic agents' ability to make sensible business, consumption, and saving choices.
Inflationary pressures also wreak chaos on income allocation. The distribution progressively
worsens because those with the means to save can increase their wealth by taking advantage of
high real interest rates in an inflationary climate, whereas those with low income cannot.
Inequality in revenue distribution undermines societal unity and integrity, destroying peace and
security. The final goal of economic policies is to improve the fiscal well-being of people.
Turkish companies have been hit hard by the lira's depreciation, which has increased production
costs while depleting people's earnings because they can now purchase less with their money.
High level of inflation has a tendency to negatively impact on the worth of the currency by
lowering its purchasing power, making it weaker against other currencies influencing the
country's excessive inflation and current account imbalance. For instance, the Turkish lira (TL)
was 8 TL was equal to 1$, yet right now (2023) 1$ worth has jumped to 19TL. Imported
products become more expensive when the value of a currency declines. Weaker currencies
mean higher prices for most countries when purchasing goods such as gasoline, resources, or
technology.

High Turkish inflation affects more than just its own current. It also affects:

 The Foreign exchange rate and foreign currency

Foreign reserves are an essential component of a country's fiscal stability and play an important
part in keeping a balanced budget. They can also help to maintain the general security of the
global monetary system. In most cases, rising inflation has a negative effect on currency
exchange rates. Turkey has a floating exchange rate, which means the Turkish lira's worth is
decided by market factors. In Turkey, exchange rate volatility has added to inflation by raising
the cost of imported products. Inflation can also be affected by a country's exchange rate, or the
worth of its currency in contrast to other currencies. If a country's currency is overrated, its
products may become less modest, slowing economic development and decreasing inflation. In
the opposite case, if a country's currency is undervalued, its products may become more
competitive, resulting in faster economic development and greater inflation.

 Investments

Inflation has an impact on investment because it raises the expense of money as long as the
borrowing costs. Interest rates on longer-term debt increase as buyers seek a higher return to
adjust for inflation risk. Higher interest rates across the maturity range increase the cost of
financing for mortgages, auto loans, adjustable-rate loans, and other debt. Furthermore, excessive
inflation causes business insecurity. Moreover, high inflation creates business uncertainty, which
can lead to postponed investment and a general weakening of economic production. Rising costs
generate uncertainty, making it challenging for buyers to determine a company's worth. Higher
input costs can also reduce revenue for businesses that are unable to effectively transfer those
costs on to consumers, resulting in reduced total consumer demand.