Turkey Makes Significant Interest Rate Hike

Facts

• In an unexpected move, Turkey's central bank hiked its key interest rate by 750 basis points to 25% on Thursday, with the Turkish lira jumping more than 3% against the US dollar. Ankara is attempting to address a new round of inflation with its reversal of prior economic policy.¹
• This rate hike comes after the central bank raised the rate to 17.5% from 15% in July. Most economists had forecast the rate hike to 20%.²
• Turkish Pres. Recip Tayyib Erdoğan has long supported an economic policy of lowering interest rates to help fight inflation, which runs contrary to traditional economic thinking. Central banks worldwide have generally been hiking interest rates to address inflation following the pandemic and the Ukraine war.³
• Since winning re-election in May, Erdoğan has added market-friendly faces to his government as Turkey faces its most dire economic crisis in decades. Erdoğan's new economic team includes former Merrill Lynch banker Mehmet Simsek, who returned as finance minister, and Hafize Gaye Erkan, who was previously co-chief executive of the now-failed First Republic Bank and took over as central bank governor.³
• The team's first step was to allow the lira to depreciate even more against the dollar in a bid to ease pressure on depleted state coffers. It also initiated technical policies to strengthen the economy and regain the confidence of foreign investors and domestic consumers.⁴
• The Turkish lira's inflation rate soared to 85% in December but now stands at around 47%. The lira has lost more than 90% of its value in the last decade, and the country's soaring inflation has discouraged foreign investment.⁵

Sources: ¹Reuters, ²Al Jazeera, ³Associated Press, ⁴France 24 and ⁵Middle East Eye.

Narratives

• Narrative A, as provided by Daily Sabah. Though the path ahead is challenging, Erdoğan's adoption of a policy to raise interest rates is a sign his government is doing its best to promote economic growth. Additionally, the president's new picks for the finance and treasury ministry, as well as the new central bank chief, will ensure Lira regains its pre-2014 value. Indeed, the lira's value has already sharply improved.
• Narrative B, as provided by The Conversation. Turkey's economy will never jumpstart with Erdoğan in power, as his disastrous economic policies have devalued the currency and squandered foreign exchange reserves. Raising interest rates could tackle inflation, but it's unclear if Erdoğan has the tools and willpower to weather the economic storm and turn around the crisis-ridden country.