Turkey Hikes Interest Rate to 15% in U-turn by Erdogan

Turkey’s central bank raised the key interest rate Thursday, almost doubling it from 8.5% to 15% as the new economic administration of recently re-elected President Recep Tayyip Erdogan embarked on a dramatic monetary policy U-turn.

The whopping 650-basis-point rate rise is the country’s first since March 2021, but was below analyst expectations of a 1,150-basis-point hike to 20%. US-based investment bank Morgan Stanley had suggested it would go up to 20%, while Goldman Sachs said it could hit 40%.

“The Committee decided to begin the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior,” the central bank, led by newly-appointed Governor Hafize Gaye Erkan, said in a statement.

Inflation is almost 40% and Turks are in the grip of a cost-of-living crisis.

The lira weakened to around 24.1 against the dollar following the news, from 23.54 before the decision was announced — a record low, according to Reuters data.

Turkey’s Erdogan an enemy of interest rates

Traditional economic orthodoxy holds that rates must be raised to cool inflation, but Erdogan, a self-declared “enemy” of interest rates who calls the tool “the mother of all evil,” vocally espoused a strategy of lowering rates instead.

The result was a cost-of-living crisis for Turks as the country’s currency, the lira, plummeted. It’s lost some 80% of its value against the dollar in the last five years, and Turkey has found itself precariously low on foreign currency reserves as it sold FX to prop up the lira.

The architect of Turkey’s attempted return to economic orthodoxy is Mehmet Simsek, the Erdogan-appointed finance minister who previously served as deputy prime minister and finance minister between 2009 and 2018, and is widely respected by investors.

After several years of Erdogan exerting heavy control over Turkey’s central bank, the president appears willing to let the monetary policymakers have more independence — at least for now.

Erdogan has been in power in Turkey for more than 20 years. He defeated his opposition rival last month in elections which international observers said suffered from an “unlevel playing field” that gave the incumbent president an unjustified advantage.

In mid-June, Erdogan said his opposition to raising rates was unchanged, but said he would abide by Simsek’s decisions in order to bring down inflation.

“Some of our friends should not be mistaken, (asking) such questions as, ‘Is our president going for a serious change in interest rate policies?’” he told reporters at the time.

“But upon the thinking of our treasury and finance minister,” Erdogan added, “we have accepted that he will take steps swiftly and comfortably with the central bank.”