Turkey’s landmark rate hike augurs economic contraction
Ankara’s departure from a much-criticized policy to keep interest rates low offers hope for a currency recovery but threatens economic recession and fresh livelihood grievances for the populace.
Turkey’s Central Bank announced the biggest hike in interest rates in more than two years Thursday. President Recep Tayyip Erdogan, who has bitterly opposed raising rates, is scrambling to restore foreign investor confidence and contain the country’s deepening economic woes.
The rate hike offers hope that the sharp depreciation of the Turkish lira and the dollarization trend in Turkey could abate but also threatens economic contraction and fresh livelihood grievances for the populace, similar to the downturn in 2018, for which Erdogan’s Justice and Development Party (AKP) paid dearly in local elections in spring 2019.
The Central Bank’s monetary policy board, chaired by new Governor Naci Agbal, increased the one-week repo rate by 475 basis points to 15%, heeding market expectations since Agbal’s abrupt appointment to the helm of the bank Nov. 6. In a bigger surprise, Erdogan’s son-in-law Berat Albayrak quit as treasury and finance minister two days later and Erdogan followed up with pledges of reform.
As an initial impact, the rate hike spurred a 2% jump in the lira in afternoon trading and Turkey’s risk premium — reflected in credit default swaps — dropped below 400 basis points. How much the rate hike will encourage Turks to keep their savings in liras and attract foreign investors remains to be seen as Turkey’s consumer inflation stands at about 12% and threatens to rise further.
