Turkey’s Central Bank hikes interest rates to tackle inflation

In a bold move to combat soaring inflation, Turkey’s central bank has increased its main interest rate to 40%, a significant rise from the previous rate of 35%. This increase surpassed expectations and marks a decisive shift in the country’s monetary policy.

The central bank, now under the leadership of Hafize Gaye Erkan, a former Wall Street banker, has been granted the freedom to escalate interest rates significantly. This move, which has seen rates jump from 8.5% to 40%, aims to curb the escalating cost of living by making borrowing more expensive and thus slowing down price rises.

In a statement, the central bank indicated that the rate hikes were nearing the level necessary to begin reducing inflation, which hit a staggering 61.36% in October. Inflation is expected to continue its upward trend, potentially peaking at around 70-75% by May next year.

President Recep Tayyip Erdogan, who had previously resisted raising interest rates despite global trends and economic orthodoxy, has altered his stance following his re-election in May. Erdogan had earlier argued that higher rates would lead to increased prices, a view at odds with conventional economic wisdom.

This policy shift comes at a critical time for Turkey’s economy, which experienced substantial growth in the early years of President Erdogan’s administration but has faced significant challenges recently. The central bank’s prior strategy of cutting interest rates amidst high inflation had precipitated a currency crisis in 2021, forcing the government to implement measures to protect lira deposits from currency depreciation.

The central bank has expressed that the current pace of monetary tightening will soon slow down, and the tightening cycle will be completed in a short period. It also stressed that interest rates would remain elevated for as long as necessary to ensure sustained price stability, reflecting a determined approach to stabilising the nation’s economy.

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Tags : Turkey