The new head of the central bank has changed course.
(Photo: Anadolu Agency/Getty Images)
Istanbul Turkey’s central bank has changed course in monetary policy under new leadership: the new head of the central bank, Hafize Gaye Erkan, announced on Thursday that monetary authorities would raise the key interest rate from 8.5 to 15 percent in the fight against high inflation and currency turbulence.
Most analysts and big banks had expected an increase to 20 to 40 percent, while analysts in Turkey had expected 12 to 30 percent.
The Turkish lira came under pressure after the decision was announced: the exchange rate to the euro was above the mark for the first time in the afternoon
from 26 lira per euro, against the US dollar the exchange rate rose to 23.62 lira.
The Turkish central bank had lowered its key interest rate from 19 percent in 2021 to 8.5 percent so far – even though the inflation rate had reached a 24-year high of 85.5 percent last October. Western central banks such as the US Fed and the European Central Bank, on the other hand, fight inflation with higher interest rates.
After his re-election at the end of May, President Recep Tayyip Erdogan signaled a change in his controversial monetary and financial policies. Erdogan recently said that his newly appointed finance minister, Mehmet Simsek, would quickly initiate interest rate hikes with the central bank. “Following our finance minister’s deliberations, we have accepted that he will take swift action in consultation with the central bank.” Nevertheless, the lira has already fallen by around 20 percent since Erdogan’s re-election.
Erdogan wants to suppress inflation
However, Turkey’s head of state describes himself as a “interest enemy”. After his re-election, he heralded the transition to a stricter interest rate policy with Simsek and the new head of the central bank, Erkan, who was trained in the USA. Erdogan said he was determined to push inflation down to single digits from the current 40 percent level. However, he will stick to his policy of “low inflation and low interest rates”.
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