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Turkey hikes interest rates in attempt to curb inflation 

Turkey finance minister Simsek Middle East investor meetings Reuters
"Whether regarding the disinflation programme or fiscal policies, the support of our president is full,” said Mehmet Simsek
  • Interest rates rise to 15% from 8.5%
  • First increase since March 2021
  • Analysts expected a larger hike

Turkey raised its benchmark interest rate by 6.5 percentage points on Thursday in the first hike since March 2021 as the central bank sought to soothe markets by bringing official borrowing costs closer to inflation.

Following its inaugural meeting under the helm of fledgling central bank governor Hafize Gaye Erkan the monetary policy committee announced it would increase the one-week repo rate to 15 percent from 8.5 percent

Erkan was one of several appointments that Recep Tayyip Erdoğan made following his surprise re-election as president last month.

Erkan, like new finance and treasury minister Mehmet Şimşek, is a market-friendly former bank industry executive and their hiring was seen as an attempt to quell fears over Erdoğan’s unconventional economic policies.

The nominally independent central bank has essentially become part of Erdoğan’s government, analysts say, slashing interest rates in response to soaring inflation. This strategy contradicts mainstream thinking that interest rates should rise to combat increasing prices.

Annual inflation was 39.6 percent in May. The central bank had slashed interest rates to 8.5 percent from 19 percent in 2021 in cuts that sent the lira tumbling to record lows versus the dollar.

Turkey’s currency has lost more than 90 percent of its value over the past decade.

In announcing Thursday’s rate hike, the central bank said it did so to curb inflation and that “monetary tightening will be further strengthened as much as needed in a timely and gradual manner”, implying additional increases were likely.

Erkan had been widely expected to raise Turkish interest rates after Erdoğan indicated he was willing to change strategy to some extent.

Liam Peach, a senior economist at Capital Economics in London, described the rate increase as “a bit underwhelming as expectations had built up for a larger hike and a faster (move) towards more orthodox policies”.

“The lira is likely to continue depreciating in the coming months even if the central bank raises interest rates further as policymakers are likely to gradually phase out foreign exchange restrictions and regulations that have been used to manage the lira in recent months,” Peach said.

He added he was confident the central bank could yet raise rates to 25-30 percent this year, citing the central bank’s hawkish comments in announcing Thursday’s increase.