Turkey’s president, Recep Tayyip Erdogan, has reversed one of his unconventional economic ideas by raising the country’s main interest rate from 8.5% to 15%.
Although the 6.5-point increase was much less than experts had anticipated, it signaled a significant policy change by his new economic team, which had been appointed to address the rising inflation.
The president of Turkey has insisted on low interest rates thus far.
The cost of living problem is gripping Turks, and inflation is close to 40%.
Hafize Gaye Erkan, 44, the head of Turkey’s central bank, was only brought in from the US this month following Mr. Erdogan’s re-election as president.
As a result of her decision, interest rates have increased for the first time since December 2020, after a stormy era during which three central bank governors were ousted in less than two years for failing to adhere to mainstream economic theory.
Despite nearly doubling to 15%, the rise is significantly less than many economists had anticipated. Morgan Stanley, a US-based investment bank, predicted a 20% increase, and Goldman Sachs predicted a 40% increase.
The bank’s monetary policy committee made it clear in its statement that Thursday’s action was the beginning of a long process.
Its members said they had “decided to begin the monetary tightening process in order to establish the disinflation course as soon as possible… and to control the deterioration in pricing behaviour”.
President Erdogan’s problem is that Turkey’s inflation rate remains stubbornly high and its central bank’s reserves have fallen to critically low levels, after it spent billions of dollars trying to prop up the lira.
Interest rates have come down from 19% two years ago to 8.5% in recent months and the change in direction will have repercussions for a country already in economic crisis.