Turkey’s Central Bank Raises Key Rate to 17.5%

Key Insights

• The Turkish Central Bank raised its key rate from 15% to 17.5%. This is the second increase since June.
• Turkey is reviewing economic policy after the re-election of Erdogan, who was opposed to raising rates.
• The Turkish lira fell to almost 27 lira against the dollar on July 20.

The Central Bank of Turkey raised the interest rate from 15% to 17.5% per annum, according to the regulator’s website.

Why Turkey’s Central Bank raised interest rate

The Turkish Central Bank has decided to continue tightening monetary policy in order to set a disinflation rate as soon as possible, anchor inflationary expectations and control prices, the press service of the regulator reports.

The rise in inflation was attributed by the Central Bank to high domestic demand, pressure due to budget spending, salaries and exchange rates, as well as rising prices in the service sector.

The regulator expects that the tightening of tax laws and pricing policy will have an additional negative impact on inflation.

What does the rate hike mean for Turkey?

Businesses in Turkey were expecting an interest rate hike of up to 20%, according to the Financial Times.

The rate hike means the country is rethinking its economic policy after the re-election of Recep Erdogan, the newspaper notes.

Some analysts fear that Erdogan, who has opposed interest rate hikes, will not allow the central bank to raise rates sufficiently to curb inflation, especially ahead of local elections in early 2024, writes the FT.

This is the second interest rate hike in Turkey in a month. On June 22, the Turkish Central Bank almost doubled the rate for the first time in 27 months: from 8.5% to 15% per annum.

Erdogan has repeatedly promised that Turkey will not give in to “global financial acrobats” calling for higher interest rates.

Erdogan’s demands to lower the key rate and make loans more affordable for businesses, despite the rise in prices, dispersed inflation.

Read also: Can Raising Interest Rates Truly Tame Inflation?

In October 2022, price growth reached a 24-year high of 85.5%, by June 2023 it had slowed to 38.21%.

According to a survey by the Turkish Central Bank, business leaders expect inflation to rise to 45% by the end of this year, writes the FT.

Bank of America said inflation in Turkey could reach 65% by May 2024.

The Turkish lira has fallen more than 20% against the dollar since early June, the FT notes. On July 20, at the time of writing, one dollar costs 26.9 lira.