Turkey’s central bank raised interest rates to 25 percent from 17.5 percent on Thursday, a significant jump that underlined the country’s president, Recep Tayyip Erdogan,’s shift towards a more conventional monetary policy to control inflation that topped an annual rate of 80 percent last year. .
The size of the increase, which put the interest rate at its highest level since 2004, was larger than expected, beating the expectations of financial analysts, who expected a more modest jump after a 2.5 percent rise in July.
After this announcement, the Turkish lira rose quickly, briefly rising more than 7% against the US dollar. It was trading at 25.6 per dollar by early evening in Türkiye.
The Central Bank of Turkey said in a statement that it “decided to continue the process of monetary tightening in order to determine the path of reducing inflation as soon as possible, to stabilize inflation expectations, and control the deterioration in pricing behavior.”
Turkey’s official annual inflation rate is down from its highest level last year, although it hit 48 percent last month. But the Turks endured a bitter cost-of-living crisis, as they watched their savings erode and prices soar as the lira lost more than 80% of its value against the dollar since 2018.
ErdoÄŸan, who overcame a re-election challenge in May, has long insisted on curbing rising prices by cutting interest rates, in defiance of a widely held economic theory. In an effort to boost Turks’ purchasing power ahead of the spring elections, he has spent billions on raising the minimum wage and raising salaries in the public sector.
Economists have warned that Mr. Erdogan’s approach is exacerbating the country’s economic crisis, where most experts say interest rates must be raised in order to curb rising inflation. During the election, Mr. Erdogan largely refused to budge.
But after the election campaign, he appointed a more traditional team to direct the country’s economy. He appointed Hafiz Cay Erkan — a Princeton-educated economist and former co-CEO of US-based First Republic Bank — to lead the country’s central bank. Mehmet Simsek, the former chief economist at Merrill Lynch, is back for another term as finance minister after being replaced by Mr. Erdogan nearly a decade ago.
Maya Senussi, an analyst at the Oxford Economics Consulting Group, called Thursday’s rate hike “a vital step towards restoring credibility” which showed Ms. Erkan and her team were serious about fighting inflation. It said in a research note that more steps are needed to restore confidence in the lira.
On Sunday, Mrs. Ercan started rolling Backing another of Mr. Erdogan’s unorthodox initiatives — an expensive scheme that allowed Turks to keep money in government-backed, inflation-proof lira accounts. The central bank, while announcing a series of regulatory changes, said it would seek to distance itself from such accounts.