This Country Raised Its Base Interest Rate to 40% in Just 6 Months

[Image source=Reuters Yonhap News]

Turkey, which has been implementing high-intensity tightening, raised its benchmark interest rate to 40% per annum. This is the aftermath of last year's global tightening trend, during which Turkey pursued a countercurrent monetary policy by repeatedly lowering rates, only to face a boomerang effect of high inflation.

On the 23rd (local time), the Central Bank of Turkey held a Monetary Policy Committee meeting and announced a 5 percentage point increase in the benchmark interest rate from 35% to 40%. This surprise hike was twice the market expectation of a 2.5 percentage point increase.

In a statement, the Central Bank of Turkey said, "The level of tightening is necessary to establish a disinflation process," and added, "Going forward, the pace of tightening will slow down, and the tightening cycle will be completed in a short period."

Market interpretations suggest that the tightening trend that has continued since May is approaching its final phase. Liam Peach, an analyst at Capital Economics, forecasted, "The Central Bank of Turkey may conclude its rapid rate hike campaign with the last increase next month."

Starting with the UK in December 2021, the world shifted to high-intensity tightening, but Turkey alone pursued a countercurrent monetary policy by continuously lowering interest rates. Despite soaring prices due to the COVID-19 pandemic and the Ukraine war, Turkey focused on economic stimulus, arguing that the depreciation of the lira would boost exports and economic growth.

President Recep Tayyip Erdo?an adhered to a low-interest rate policy based on Islamic teachings that condemn high interest rates, and replaced the central bank governor three times over the past four years for advocating rate hikes. Turkey is considered a country where the central bank is under presidential control and does not exercise independent authority.

After winning re-election in the presidential election last May, President Erdo?an abandoned the low-interest rate policy and shifted to high-intensity tightening. Since May, Turkey has raised its benchmark interest rate six consecutive times, pushing it from 8.5% to 40%. This represents a massive 31.5 percentage point increase in just six months.

Turkey is currently suffering from brutal high inflation. Last month, consumer prices soared 61.36% compared to the same month last year. Although inflation peaked at 85% in October last year and then declined, it began rising again from July this year. The Central Bank of Turkey expects the inflation rate to peak at around 70-75% by May next year.

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