In Turkey, Erdogan Signals Shift to Conventional Economics

Turkey’s central bank sharply raised interest rates on Thursday, the clearest sign yet that President Recep Tayyip Erdogan is shifting his country toward more orthodox economic policies in the hope of taming a painful cost-of-living crisis.

The spike in rates, to 15 percent from 8.5 percent, came less than a month after Mr. Erdogan, Turkey’s dominant politician for two decades, won a third presidential term despite a challenge from a newly unified opposition, high inflation that has left many Turks feeling poorer and catastrophic earthquakes in February that killed more than 50,000 people.

Members of Turkey’s opposition had feared that Mr. Erdogan would capitalize on his victory to crack down on his opponents and further consolidate power. But to date he has made no drastic moves and has largely stuck to his previous positions, including the use of Turkey’s membership in NATO to block Sweden from joining the alliance.

His largest shift has been in economic policy, an apparent effort to head off the threat of interlocking economic problems that economists say are largely of Mr. Erdogan’s making.

The official annual inflation rate rose above 80 percent last year and was at 39.5 percent last month, eroding the purchasing power of Turkish families and sending the nation’s currency, the lira, plunging to record lows. Outside groups have accused the government of manipulating the statistics, saying the actual inflation rate is twice as high.

In the run-up to last month’s election, Mr. Erdogan tapped the central bank’s foreign currency reserves to prevent the lira from falling further while unleashing billions of dollars of new spending to insulate voters from the immediate impact of high inflation. He increased the minimum wage, hiked civil servant salaries and changed regulations to allow millions of Turks to draw early government pensions.

Mr. Erdogan also insisted on repeatedly reducing interest rates, from 19 percent in 2021 to 8.5 percent this year, in defiance of orthodox economic theory and practice, which call for raising rates to control inflation.

Since his victory on May 28, Mr. Erdogan has not directly announced a change of course, but has made several moves that point to more conventional economic policies that, while aimed at taming inflation and reducing the threat of a currency crisis, could also throw the economy into a recession.

He reappointed Mehmet Simsek, a highly regarded former Merrill Lynch banker and minister in Mr. Erdogan’s government, as finance minister. To head the central bank, he named Hafize Gaye Erkan, a Princeton-educated economist and former executive at the now-defunct First Republic Bank. Ms. Erkan is the first woman in Turkey to hold the post.

In announcing the interest rate hike, the bank said that further increases would follow “in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.”

Given the new appointments, many analysts had expected an even bolder rate hike, and the value of the lira continued to slide after the new rate was announced.

Mr. Erdogan has long promoted the unorthodox idea that lower rates lead to lower inflation, a theory that did not work out but that did deliver continuous economic growth.

It remains unclear whether Mr. Erdogan will continue to allow interest rates to rise if Turkey’s economy starts to slow.