Turkey’s central bank raised the country’s interest rate from 8.5 percent to 15 percent to combat skyrocketing inflation. Nearly doubling sounds like a lot, but economists had been counting on an increase to 21%. The increase represents a notable change of course in the policy of the Turkish central bank and the government.
The rate hike is a 180-degree turn in Turkish monetary policy, which has been characterized by unusually low interest rates in recent years. The Turkish central bank, under pressure from President Recep Tayyip Erdogan, steadily cut interest rates as consumer prices started to rise sharply.
Unconventional look
It is normal for a central bank to raise interest rates to fight inflation, but Erdogan thought otherwise. Interest rates then remained low for years, with the inevitable result that the Turkish lira fell sharply in value and inflation reached 85% last year.
Turkey’s inflation has since fallen to around 40% in May. Not so much because of prudent monetary policy, but because of all the showers the president has taken to be re-elected. For example, he gave free gas to families for a month and increased the salaries of civil servants just before the election.
Hafise Gaye Erkan
Last month, however, Erdogan announced his intention to return to more conventional economic policies and appointed a new central bank governor, Hafize Gaye Erkan, making him the first female central bank governor. She previously worked for US investment bank Goldman Sachs and was a top executive at First Republic Bank between 2014 and 2021, which fell this year. In short: someone who knows that interest rates must rise in response to inflation.
Strong developments in domestic demand, cost pressures and persistent services inflation were the main drivers, the central bank said in a statement. In it, the central bank also explains that higher interest rates should curb inflation “as soon as possible” and that this will continue gradually “until the inflation outlook has improved significantly”.
Also listen | The Turkish finance minister returns to his old nest
Whether Erkan will stay in office for long remains to be seen, as Erdogan has appointed a new central bank president five times in the past four years. The latest governor to raise interest rates, Naci Agbal, was sacked in 2021, five months after taking office.
Turkey also now has a new finance minister, the widely respected former banker Mehmet Simsek. Simsek has previously said he would fight inflation “on rational grounds,” which encourages that Turkey is sailing towards a normalized economic course.
Source: BNR
Andrew Dwight is an author and economy journalist who writes for 24 News Globe. He has a deep understanding of financial markets and a passion for analyzing economic trends and news. With a talent for breaking down complex economic concepts into easily understandable terms, Andrew has become a respected voice in the field of economics journalism.
