The Turkish Economy is Transforming under New Monetary Policy

By. Justin Mays

Investors see opportunity in Turkey since new leadership at the Turkish Central Bank has enacted economic reforms with encouraging results. On February 18, Central Bank Chief Naci Agbal kept the country’s main policy rate at 17 percent, after having moved it up by 6.75 percentage points to arrest the rampant inflation that had worried foreign investors and pushed Turkish citizens to sell their Lira for hard currencies. Appointed in November 2020, Agbal has implemented policies contrary to those of his predecessors who, in line with President Recep Tayyip Erdogan’s preference for credit-fueled growth, had kept rates low even when inflation surged.

The former Central Bank Chief, Murat Uysal, was unable to stop the fall of the Turkish Lira which lost more than 40% of its value against the Dollar under his tenure. In contrast, Agbal’s approach is managing inflation and is rebuilding the bank’s credibility making the Lira more attractive to foreign investors. Inflation continues to accelerate but is expected to slow in April. It rose 15 percent in January 2021 over January 2020. This surpassed the central bank’s official target of 5 percent however interest rates are 2 percent higher offering investors inflation-adjusted yields that rank among the highest in emerging markets while, in comparison, developed market debt is near historic lows. Agbal's monetary tightening has lifted Turkey's real rate from negative territory to 2.4%, compared to an EM average of 0.5%.The central bank may begin to slowly reduce interest in line with disinflation rates by April and will rebuild its foreign currency reserves. Agbal’s orthodox approach to monetary policy and his ties with leadership are building investor confidence and since his appointment the Lira has soared by 20 percent, by far the best in emerging markets making this a favorable time to invest in Turkey. While Agbal continues to stabilize inflation, buying properties in Turkey is one of the easiest ways to enter the market while exchange rates are favorable.

“I hope we will reveal our determination to grow our country once again by announcing our economic reform package,” Erdogan stressed at the AKP’s Istanbul provincial congress on Feb. 24, 2021. In mid-March Ankara will be sharing their new plan to further strengthen the economy.