Turkey's Central Bank dramatically raised its key interest rate to 40%, an increase of 500 basis points, as it grapples with surging inflation and a weakening currency. This decision doubles the anticipated adjustment predicted by economists, who had forecasted a 250-basis-point rise.
The substantial hike comes as part of the bank's ongoing efforts to address soaring inflation rates, which hit 61% in October, and stabilize the Turkish lira. Following the announcement, the lira strengthened slightly against the dollar, trading at 28.766.
Timothy Ash, an emerging markets strategist at BlueBay Asset Management, was among the few experts who foresaw such a significant hike. He lauded the Central Bank of the Republic of Turkey (CBRT) for its proactive stance, saying, "Really impressive move by the CBRT - probing their orthodoxy and getting well ahead of expectations. These guys and girls are serious about fighting inflation. We need to give them credit for that."
This latest increase is the sixth major rate hike in a series aimed at combating rampant inflation that has severely impacted Turkish households. The CBRT's statement indicated that the current monetary tightness is nearing the level needed to establish a disinflation course. As such, they anticipate a slowdown in the pace of monetary tightening and expect to complete the tightening cycle shortly.
This aggressive monetary policy marks a stark reversal from President Recep Tayyip Erdogan's previous unconventional approach of slashing interest rates to combat inflation. Erdogan's strategy, which runs counter to traditional economic wisdom, has been widely criticized and blamed for the country's economic challenges, including a currency crisis and escalating living costs.
Since Erdogan's reelection in May, there has been a significant shift in economic policy with the appointment of a new economic team. This team, which includes former Merrill Lynch banker Mehmet Simsek as finance minister and Hafize Gaye Erkan, a former U.S.-based bank executive, as the central bank governor, has rapidly moved away from Erdogan's low-interest-rate policy.
Under Erkan's leadership, the central bank has dramatically increased its main interest rate from 8.5% to the current 40%. These changes come as other global central banks have also been aggressively raising interest rates in response to inflationary pressures exacerbated by the COVID-19 pandemic and the ongoing conflict in Ukraine.
As Turkey continues to face economic challenges, this recent bold move by the central bank reflects a significant shift in strategy as the country seeks to stabilize its economy and currency.
