Turkey’s central bank has raised interest rates for the first time in more than two years, from 8.5% to 15%, but there is widespread concern that the move is insufficient to combat rising inflation and a continuing economic crisis.
The decision marks a partial shift in the unorthodox economic policy of the president, Recep Tayyip Erdoğan, under which interest rates have been frozen since March 2021 despite a sharp devaluation in the Turkish lira.
Investors appeared unconvinced that the hike was large enough to tame inflation, and the currency fell 4% to hit new record lows of 24.55 lira to the dollar.
The central bank’s monetary policy committee said it had raised rates “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 behaviour”.
Inflation has risen to levels that are proving unbearable for large sections of the population, causing a widespread cost of living crisis. Officially, inflation in Turkey is at 39.59%, although unofficial estimates from Turkey’s independent Inflation Research Group put it at 110%.
“Today’s decision is insufficient to offset the weakening of the lira, and hence upwards risks in inflationary pressures are more likely to materialise,” said Selva Demiralp, a professor of economics at Koç University in Istanbul. “This is because the real policy rate is still significantly negative even after today’s rate hike.”
A steeper rise in interest rates had been hotly anticipated following the return of Mehmet Şimşek, a former economist at the US embassy in Ankara and banker at Merrill Lynch and UBS, to the post of finance minister after Erdoğan’s re-election, as well as the recent appointment of the economist and banker Hafize Gaye Erkan to the post of central bank governor.
Financial experts had pointed to the need for substantive policy changes, notably a substantial rise in interest rates, in order to demonstrate a return to the independence of the central bank and more orthodox economic policy.
“It looks like the central bank and the new economic team are allowed a rather limited room to manoeuvre, which is insufficient to offset inflationary pressures,” Demiralp said. “I don’t consider today’s hike as a signal of a U-turn from unorthodox policies that were pursued before the elections. It sounds more like a temporary detour.”
She added: “I expect the pressures on the exchange rate to continue, and likely exceed 30 lira to the dollar.”
The lira halved in value in 2021 and has continued to decline steadily since. Erdoğan’s re-election prompted a historic further drop in its value, surpassing 20 lira to the dollar.
Bloomberg economists estimated in May that Turkish authorities had spent $177bn (£138bn) propping up the lira since it crashed in December 2021.
Erdoğan, who described himself as an economist in a pre-election interview with CNN, has outlined his long-held objection to raising interest rates, believing that it causes rather than curbs inflation. He has dismissed several central bank governors in disputes over economic policy. Erkan is the fifth governor since 2018.
This week the Turkish vice-president, Cevdet Yılmaz, and Şimşek made a one-day visit to the United Arab Emirates before Erdoğan is due to visit. The two countries signed a $40bn trade agreement in March, ratified shortly after Erdoğan’s re-election, as part of deepening economic ties amid efforts by Erdoğan and other Turkish officials to attract Gulf investment amid a foreign currency shortage.
In January last year, the Turkish central bank and its Emirati counterpart agreed a £3.8bn currency swap.
