In a significant shift from President Erdogan’s long-standing economic policy, the central bank of Turkey has raised interest rates for the first time in over two years. The decision comes amidst concerns that the rate hike may not be enough to combat escalating inflation and the ongoing economic crisis gripping the country.
The Turkish central bank announced on Wednesday that it would increase interest rates from 8.5% to 15%, a move aimed at curbing inflation and stabilizing the country’s struggling economy. President Erdogan, known for his unconventional approach to economic policy, has long favored maintaining fixed interest rates despite the devaluation of the Turkish lira.
However, investors remain skeptical about the effectiveness of the rate hike, as the Turkish lira dropped 4% to all-time lows in response to the announcement. This decline reflects concerns that the increase in interest rates may not be sufficient to address the deep-rooted issues affecting the Turkish economy.
The monetary policy committee of the central bank has outlined several objectives for the rate hike, including establishing a disinflation course, anchoring inflation expectations, and regulating pricing behavior. Turkey currently faces an official inflation rate of 39.59%, although independent estimates suggest it may be as high as 110%.
Financial experts and economists had anticipated more substantial policy changes, such as a significant increase in interest rates, to restore central bank independence and implement orthodox economic policies. The limited scope of the adjustment and the absence of broader policy shifts suggest that the rate hike may be temporary, rather than an indication of a complete reversal in Erdogan’s unconventional economic approach.
Despite the rate increase, the pressure on the Turkish lira is expected to persist, with some predictions suggesting it could surpass 30 lira per dollar. Since Erdogan’s re-election, the Turkish currency has experienced a significant devaluation, losing half of its value in 2021 alone and continuing its downward trend.