Turkey’s Central Bank shifts gears, hikes interest rates to 25%

ANKARA — Turkey’s Central Bank hiked interest rates Thursday by 750 basis points from 17.5% to 25%. The larger than expected rise prompted the Turkish lira to recover from a record low.

It was the largest rate hike since an overhaul of the country’s economic management team that has pledged to gradually shift to tighter monetary policies. A statement following its monthly monetary policy committee meeting on Thursday announced that the bank was shifting gears to faster monetary tightening, citing Turkey’s runaway inflation, which stood at nearly 50% in July.  

“The committee decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations and to control the deterioration in pricing behavior,” the statement read.

The hike prompted the Turkish lira to surge by more than 3%. As of mid-afternoon Istanbul time on Thursday, the lira was worth 26.34 to the dollar after sinking to a record low earlier this week amid expectations of a lower interest rate hike. 

The lira's value plummeted as economists were expecting a hike to up to 20%, and the Turkish government signaled earlier this week that it was planning to phase out its controversial lira protection scheme, which is designed to safeguard deposits by compensating depositors for currency depreciation.

It is the third interest rate hike since Turkish President Recep Tayyip Erdogan’s U-turn from his unconventional economy policy after his reelection in May. Erdogan had previously kept rates low even as inflation soared, but his government is now promoting rate rises after appointing two top economists: Finance Minister Mehmet Simsek and Central Bank Governor Gaye Erkan. 

Under Erkan, a former US banking executive, the bank hiked its policy rates by 700 basis points in June and July. It pledged a gradual shift to tighter monetary policies, but Thursday's increase signals that the bank has shifted gears amid soaring inflation. 

Prior to Erkan's appointment, the bank slashed the country’s policy rates to 8.5% in a series of cuts over the past two years to boost economic growth at the expense of inflation and devaluation of the Turkish lira. The cuts fanned Turkey’s already high inflation to record levels, leading to a cost of living crisis. The annual inflation reached a 24-year high of 85.5% last October before easing to 47.83% in July. The cuts also sent the lira to a record low, causing it to lose more than 30% of its value over the past year.

Following the rate hike on Thursday, Simsek reiterated the new economy management’s resolve on tighter monetary policies. “We are committed! Price stability is our top priority,” he tweeted.