Ankara, Turkey, June 25: Turkey’s central bank implemented a significant interest rate hike, marking a shift towards more conventional economic policies. The decision comes amid criticism that President Recep Tayyip Erdogan’s approach has worsened the cost-of-living crisis and inflation in the country.
During its closely watched interest rate-setting meeting, the central bank raised its key rate by 6.5 percentage points, bringing it to 15% from the current 8.5%.
The move follows the recent appointments of internationally respected officials to lead the central bank and the finance ministry, signaling a change in direction.
This interest rate hike signifies a departure from Erdogan’s belief that lowering interest rates fights inflation.
Erdogan, who has been critical of high borrowing costs, stated that he would accept the policies of the new finance minister while maintaining his own unchanged views.
Traditional economic theory contradicts this view, as central banks worldwide have been rapidly raising rates to combat inflation tied to the post-pandemic rebound and Russia’s invasion of Ukraine.
Several European central banks, including the Bank of England and the Swiss National Bank, also raised rates.
The Monetary Policy Committee of the Turkey’s central bank explained that the rate hike is part of a monetary tightening process aimed at establishing a disinflation course as soon as possible. They expressed the intention to strengthen monetary tightening gradually until a significant improvement in the inflation outlook is achieved.
Independent research group ENAG suggests that the actual inflation rate last month reached 109%.
Economists argue that Erdogan’s unconventional economic approach has exacerbated the country’s economic turmoil, leading to currency depreciation and a cost-of-living crisis.
Critics believe that the central bank’s foreign currency reserves have been depleted in an attempt to support the Turkish lira ahead of recent elections, causing a 21% decline in the currency’s value against the US dollar this year.
Following the interest rate announcement, the lira weakened by 3% against the dollar.
However, Erdogan, who secured a third term in a runoff election in May, has hinted at a move towards more pragmatic policies in the economic realm.
The interest rate hike by Turkey’s central bank suggests a potential economic turnaround and a shift away from Erdogan’s unorthodox economic policies.
Experts anticipate that this shift may extend to other problematic areas as well including its foreign policy.
