Turkish central bank raises key interest rate sharply

2023-06-22 13:29:19

The Turkish central bank is changing course in monetary policy under new leadership due to persistently high inflation and currency turbulence. The central bank, led by its new boss Hafize Gaye Erkan, announced on Thursday that the key interest rate would be raised from 8.5 to 15.0 percent. Economists polled by Reuters had even expected a larger step up to 21.0 percent.

The central bank had lowered its key interest rate from 19 percent in 2021 to 8.5 percent so far – even though the inflation rate had reached a 24-year high of 85.5 percent last October. Western central banks such as the American Fed and the ECB, on the other hand, fight inflation with higher interest rates.

Persistently high inflation in the UK

This also includes the Bank of England: On Thursday, it surprisingly increased the key interest rate by half a percentage point to 5.0 percent. Persistently high inflation is breathing down the necks of the currency watchdogs. Surprisingly, this did not fall in May and remained at 8.7 percent. Before the price data, economists had expected a rate hike of just 0.25 percentage points.

After his re-election a few weeks ago, Turkish President Recep Tayyip Erdogan signaled a change in his controversial monetary and financial policies. His newly appointed finance minister, Mehmet Simsek, will take swift steps with the central bank, Erdogan recently said: “Following the considerations of our finance minister, we have accepted that he will take swift action in consultation with the central bank.”

Erdogan’s about-face

Erdogan has described himself as a “interest enemy”. After his re-election, however, he heralded the transition to a stricter interest rate policy with Simsek and the new head of the central bank, Erkan, who was trained in the USA. Erdogan said he was determined to push inflation down to single digits from the current 40 percent level. However, he will stick to his policy of “low inflation and low interest rates”.

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The current interest rate policy has triggered a currency crisis. The national currency, the lira, lost 44 percent in value in 2021 and another 30 percent in 2022. This exacerbates the inflation problem because the country, which is poor in raw materials, purchases many goods from abroad and has to pay for them in foreign currency. The authorities have therefore tapped into the central bank’s reserves to stabilize the currency. Still, the lira has already fallen about 20 percent this year.

After the interest rate hike by the Turkish central bank was not as large as expected, the stock market is picking up. The leading Turkish index is 2.5 percent firmer after previously being up 0.7 percent. The Turkish lira, meanwhile, has fallen to a record low against the dollar. In return, the dollar is 2 percent firmer at 24.20 lira.