The headquarters of Turkey's central bank, in Ankara, on Jan. 24, 2014.Umit Bektas/Reuters
Turkey’s central bank raised its key interest rate by an aggressive 7.5 percentage points on Thursday, in a new sign of a return to more traditional economic policies under President Recep Tayyip Erdogan.
The bank hiked its policy rate to 25 per cent as it continues to backtrack from a rate-cutting course set by Mr. Erdogan, which has been blamed for inflaming a cost-of-living crisis. Many households have been left struggling to afford rent and basic goods as inflation has surged.
Mr. Erdogan has long argued that lowering interest rates helps fight inflation, a theory that runs contrary to traditional economic thinking.
Central banks around the world have been hiking rates to bring consumer price rises under control following the COVID-19 pandemic and Russia’s war in Ukraine. The Turkish central bank, however, started cutting rates in late 2021 under pressure from Mr. Erdogan.
After winning re-election in May, Mr. Erdogan appointed a new economic team, signalling a return to more conventional policies.
The team includes former Merrill Lynch banker Mehmet Simsek, who returned as finance minister, a post he held until 2018, and Hafize Gaye Erkan who took over as central bank governor. The first woman to hold that position, Ms. Erkan was previously co-chief executive of the now-failed San Francisco-based First Republic Bank.
Following Ms. Erkan’s appointment, the bank raised the key policy rate by 6.5 percentage points, to 15 per cent, in June and then by 2.5 percentage points, to 17.5 per cent, in July.
Before that, the central bank had cut its key interest rate from around 19 per cent in 2021 to 8.5 per cent earlier this year. Mr. Erdogan has fired three central bank governors who resisted pressure to cut rates before appointing Ms. Erkan’s predecessor in 2021.
The higher borrowing costs announced Thursday come as inflation reached 47.83 per cent in July, down from a peak of more than 85 per cent in October. Independent economists, however, say the real inflation rate is much higher – at nearly 123 per cent.
“We are determined,” Mr. Simsek wrote on X, the platform formerly known as Twitter. “Price stability is our top priority.”
The central bank said it “decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behaviour.”
Ms. Erkan has estimated that inflation will reach 58 per cent at the end of the year – up from the 22.3 per cent her predecessor had predicted.
Economists say Mr. Erdogan’s unorthodox policies exacerbated economic turmoil, leading to currency and cost-of-living crises that have brought hardship to households.
Mr. Erdogan insists his economic model stimulates growth, exports and employment.
The Turkish lira has lost more than 30 per cent of its value against the U.S. dollar since the start of the year. Experts say the central bank has depleted its foreign currency reserves as it tried to prop up the currency ahead of May’s elections.