Erdogan Gives In to Brutal Inflation... Turkiye Raises Benchmark Interest Rate Sharply to 30%

Central Bank Raises Policy Rate from 25% to 30%
Rapid Shift in Monetary Policy Leads to Four Consecutive Monthly Hikes

Turkey has raised its benchmark interest rate to 30%, the highest level in 20 years, to curb soaring inflation. Analysts say that Turkey, which had maintained a low-interest-rate policy despite high inflation and pushed its economy to the brink of collapse, is now belatedly moving toward rapid normalization of its economic policies.

President Recep Tayyip Erdogan
[Photo by Yonhap News]

The Central Bank of Turkey raised its policy rate by 5 percentage points at once, from 25% to 30%, on the 21st (local time). This marks the fourth consecutive monthly increase since June, with monetary authorities signaling further tightening.

Turkey is continuing such ultra-high-intensity tightening because inflation has reached a deadly level. Turkey's annual consumer price inflation rate recorded 59% in August. Although this is lower than the peak of 85% in October last year, it remains abnormally high. The Central Bank of Turkey also explained that the reason for the rate hike was that consumer price inflation in July and August this year was higher than expected.

President Recep Tayyip Erdogan has been rapidly normalizing the abnormal monetary policy he had maintained since his re-election in May.

Contrary to conventional economic theory, he argued that high interest rates fuel inflation and pushed the central bank to lower rates from around 19% at the end of 2021 to 8.5% in March this year. The Central Bank of Turkey was unable to exercise independent authority under the president's control. During this process, prices surged, the lira's value plummeted, and the economy deteriorated to near collapse, prompting a change of mind after his re-election. It is reported that the new economic team, composed of technocrats, persuaded him that failing to raise rates sharply immediately would lead to an economic crisis.

Market analysts say it is unclear whether inflation will sufficiently slow down despite Turkey's rapid rate hikes.

International credit rating agency Fitch upgraded Turkey's sovereign credit rating from 'negative' to 'stable' this month due to changes in monetary policy stance but pointed out that "there remains uncertainty regarding the scale, sustainability, and success of policy adjustments to curb inflation due to political considerations."

Turkey is facing local elections in March next year. Accordingly, there are also views that it will be difficult to sustain a substantial tightening of policies.

This content was produced with the assistance of AI translation services.