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Türkiye Central Bank hikes interest rates by 6.5 percent, Lira falls

Marks a return to more orthodox monetary policymaking
Türkiye Central Bank hikes interest rates by 6.5 percent, Lira falls
Turkish rise in interest rates

Türkiye’s Central Bank hiked interest rates by only 6.5 points to 15 percent from 8.5 percent on Thursday, counter to what Turkish President Recep Tayyip Erdogan had been unconventionally implementing as an economic policy of low-interest rates. The idea today is to tame inflation which had been soaring.

The increase is the first since March 2021 and marks a return to more orthodox monetary policymaking.

Newly appointed Türkiye Central Bank governor Gaye Erkan, a former US Wall Street executive, held the meeting yesterday. “The committee decided to begin the monetary tightening process to establish the disinflation course as soon as possible, to anchor inflation expectations and to control the deterioration in pricing behavior,” a statement from the bank said.

“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” the statement added.

The Turkish lira has undergone a record fall against the dollar registering 24.17 liras to the dollar, actually higher than the 23.81 before the announcement. Authorities believe that this will reverse course.

Read: Türkiye’s lira hits record: Can it afford a return to an interest rate cut policies?

New Finance Minister Mehmet Simsek is on the other side of this new policy equation. He previously served as deputy prime minister and finance minister between 2009 and 2018 and is widely respected by investors.

A Reuters poll last week placed interest rate hike expectations at up to 20 percent.

Inflation reached a 24-year high of 85.5 percent last year before easing to 39.6 percent in May 2023, largely due to the Central Bank’s depletion of its foreign reserves with net foreign reserves falling below zero in May, according to official figures. They declined by more than $8 billion in April alone.

Independent research group ENAG says the true inflation rate is 109 percent.

The Lira has lost around 21 percent of its value against the dollar since the start of the year.

Last Tuesday, the Turkish government hiked the minimum wage by 34 percent to ease inflation in households

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