Turkey Raises Main Interest Rate to 40% to Tackle Soaring Inflation

Turkey Raises Main Interest Rate to 40% to Tackle Soaring Inflation

In a significant move, Turkey’s central bank has raised its main interest rate to 40%, a notable increase from the previous rate of 35%. This unexpected surge is part of an intensified effort to address the surging inflation rates in the country. Turkey’s inflation reached 61.36% in October and is anticipated to peak around 70–75% in May next year.

This decisive step marks a departure from President Recep Tayyip Erdogan’s previous resistance to raising interest rates, as he contended that higher rates would contribute to price hikes. However, since his re-election in May, Erdogan’s economic stance has shifted, allowing the central bank, led by its new chief, Hafize Gaye Erkan, a former Wall Street banker, to significantly increase interest rates from 8.5% to the current 40%.

The central bank emphasised that this substantial rate hike is part of an ongoing effort to curb inflation, and it suggests that rates are nearing the level required to initiate a decrease in inflation. The statement also indicated that the pace of monetary tightening would decelerate and that the tightening cycle would be completed in a short period of time.

Acknowledging the challenges faced by Turkey’s economy, which experienced significant growth in the early years of Erdogan’s leadership but has encountered difficulties in recent years, the central bank outlined its commitment to maintaining interest rates at a high level for as long as necessary to ensure sustained price stability.

Turkey’s previous policy of cutting interest rates despite high inflation led to a currency crisis in 2021. The government responded by implementing a scheme to safeguard lira deposits from currency depreciation. The current move to raise interest rates aligns with global trends, where central banks are taking measures to counter rising inflation by adjusting interest rates upward.

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