Turkey hikes interest rate to 40% – highest in 20 years

Turkey’s central bank has taken bold steps in addressing the country’s economic challenges, implementing its sixth consecutive interest rate hike in an effort to tackle the staggering double-digit inflation that has been plaguing the nation.

The move comes as households grapple with the increasing costs of basic goods and struggle to make ends meet.

In a surprising move, the central bank raised its policy rate by a substantial 5 percentage points, bringing it to a sizeable 40%.

This decision marks a departure from President Recep Tayyip Erdoğan’s previous unorthodox approach of cutting interest rates to combat inflation, a policy that had led to economic turmoil, including a currency crisis and a spike in the cost of living.

The inflation rate in Turkey reached a staggering 61.36% last month, prompting global concerns. Many attribute this economic turmoil to Erdogan’s unconventional methods and resistance to the widely accepted practice of raising interest rates to counter inflation.

A change in Erdoğan’s strategy?

The recent shift in policy aligns with the changes in Erdoğan’s economic team following his re-election in May.

The newly appointed team, led by former Merrill Lynch banker Mehmet Simsek as finance minister and Hafize Gaye Erkan as central bank governor, has swiftly moved to reverse the previous strategy of keeping interest rates low.

Erkan, a former US-based bank executive, assumed the role of central bank governor in June and has overseen a remarkable increase in the main interest rate from 8.5% to the current 40%. This significant tightening of monetary policy reflects a commitment to establishing a disinflation course and stabilising the economy.

Despite the drastic measures, the central bank assured that the era of rapid interest rate hikes would soon come to an end.

“The current level of monetary tightness is significantly close to the level required to establish the disinflation course,” the bank stated. It anticipates that the pace of monetary tightening will slow down, and the tightening cycle will be completed in a short period.

This strategic change in approach has been met with a degree of scepticism, given Erdoğan’s historical resistance to orthodox economic practices.

Nevertheless, the central bank remains steadfast in its commitment to maintaining high interest rates for as long as necessary to ensure sustained price stability.

Turkey, once celebrated for its dramatic economic growth under Erdoğan’s leadership, has faced challenges in recent years.

The currency crisis in 2021, triggered by the central bank’s previous policy of cutting interest rates despite high inflation, prompted the government to introduce measures to protect lira deposits from currency depreciation.