Türkiye's Central Bank has raised its main interest rate to 40%, surpassing expectations and marking a considerable increase from the previous rate of 35%. The decision underscores a concerted effort to combat the surging inflationary pressures gripping the country.
Previously, resistant to conventional economic wisdom, President Recep Tayyip Erdogan had argued against raising interest rates, contending that such measures would exacerbate inflation. Following his re-election in May, there has been a notable shift in his stance.
Under the leadership of the new central bank chief, Hafize Gaye Erkan, a former Wall Street banker, the institution has moved decisively to raise interest rates from 8.5% to the current 40%, signalling a departure from previous policies.
The decision comes as Türkiye grapples with a significant inflation rate, reaching 61.36% in October, with projections foreseeing a further increase to peak around 70 to 75% in May of 2024. The central bank's statement indicates that this aggressive interest rate hike aims to curb inflation by increasing the cost of borrowing, aligning with global efforts by central banks to combat rising prices.
"The pace of monetary tightening will slow down, and the tightening cycle will be completed in a short period," stated the central bank, affirming its commitment to sustaining a high-interest rate environment for "as long as needed to ensure sustained price stability."
This strategic shift follows the central bank's prior policy of cutting interest rates despite persistent inflation, which triggered a currency crisis in 2021. In response, the government introduced protective measures for lira deposits to mitigate the impact of currency depreciation.
Türkiye's economy, once marked by dramatic growth under President Erdogan's early leadership, has faced challenges in recent years. The current move by the central bank reflects a proactive approach to stabilize the economy and address the pressing issue of inflation that has plagued the nation.
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