Turkey's Central Bank Raises Key Interest Rate by 2.5 Percentage Points to Tackle High Inflation
Turkey's central bank has once again increased its key interest rate by 2.5 percentage points, as part of a continued effort to combat soaring inflation. The move comes after inflation in the country reached nearly 65% in December, causing significant economic challenges for households.
This latest rate hike raises the benchmark rate to 45%, marking the eighth increase since President Recep Tayyip Erdogan abandoned his unconventional economic policies. These policies, which sought to combat inflation by cutting interest rates, were widely criticized by economists. They argued that such measures contributed to a currency crisis and led to a significant increase in the cost of living, making it difficult for many households to afford basic goods.
While Erdogan had long advocated for lower interest rates to tackle inflation, central banks around the world took the opposite approach, raising rates rapidly to counteract spikes in consumer prices resulting from the COVID-19 pandemic and global geopolitical tensions such as the conflict in Ukraine.
In contrast to Turkey, the European Central Bank is expected to maintain its record-high benchmark rate without any immediate changes. The Turkish central bank, on the other hand, has expressed its commitment to utilizing all available tools to achieve its primary objective of price stability.
However, analysts remain skeptical about whether this interest rate increase will be sufficient to effectively address the country's persistent inflation problem. Bartosz Sawicki, a market analyst at Conotoxia fintech, stated that the cumulative tightening of 3,650 basis points may not be enough to decisively rein in Turkey's longstanding inflation issue. Furthermore, Cagri Kutman, a Turkish market specialist at KNG Securities, suggested that a 2.5% rate hike to 45% is unlikely to have an immediate impact on reducing inflation.
It is worth noting that Erdogan only shifted his economic policies after securing a third term in office. In doing so, he appointed a new economic team led by former Merrill Lynch banker Mehmet Simsek as finance minister. Additionally, Hafize Gaye Erkan, a former U.S.-based bank executive, became the first woman to hold the position of central bank governor in Turkey when she assumed the role in June. Under her leadership, borrowing costs have increased significantly, rising from 8.5% to the current 45%.
Previously, Erdogan had fired central bank governors who resisted his push to cut interest rates. Nonetheless, speculation arose recently regarding Erkan's possible removal from office following allegations that her father was exerting influence over the bank and that she had dismissed an employee. In response, Erdogan expressed his support for the central bank governor, labeling the claims as 'irrational rumors designed to destroy the climate of trust and stability in the economy.'
As Turkey continues its battle against high inflation, it remains to be seen whether the latest interest rate hike will be enough to bring about meaningful change. With local elections on the horizon in March, analysts suggest that further rate hikes may not occur immediately. The country will have to navigate carefully in the coming months to address its economic challenges and restore stability.
