KEY POINTS
- The rate hike is Turkey’s first since March 2021.
- Turkey steadily lowered its policy rate from 19% in late 2021 to 8.5% in March as inflation concurrently ballooned, breaching 80% in late 2022.
- Erdogan recently appointed Mehmet Simsek as finance minister, whose aim is to return Turkey to economic orthodoxy after a prolonged cost-of-living crisis.
Turkey’s central bank jacked up the country’s 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 hike is the first rate rise since March 2021.
Turkey steadily lowered its policy rate from 19% in late 2021 to 8.5% in March as inflation ballooned, breaching 80% in late 2022 and easing to just under 40% in May. 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 artificially 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 accepted that short-term pain is necessary to redress the economy, and that appearing to empower Simsek will play well with markets,” George Dyson, a senior analyst at consultancy Control Risks, told US.Mistertruth about the decision.
“The question will be how long Erdogan will tolerate that pain for, and if and when societal pressure get too much and he wrests back control from Simsek,” he said. “The temptation will be ever present for Erdogan to intervene once again.”
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, such as (asking), ‘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, comfortably with the central bank.”