Turkey’s central bank raised interest rates to 25 percent from 17.5 percent on Thursday, a big jump that underscored a shift by the country’s president, Recep Tayyip Erdogan, toward a more orthodox monetary policy. to control inflation that exceeded the annual rate of 80 percent last year.
The size of the increase, which put the benchmark rate at its highest level since 2004, was larger than expected, beating forecasts from financial analysts, who had predicted a more modest jump after a 2.5 percent increase in July.
After the announcement, the Turkish lira rallied quickly, briefly rising more than 7 percent against the US dollar. It was trading at 25.6 per dollar in the early evening in Turkey.
In a statement, the Turkish central bank said it had “decided to continue the monetary tightening process to establish a course of disinflation as soon as possible, to anchor inflation expectations, and to control deterioration in -pricing behavior.”
Turkey’s official annual inflation rate is down from last year’s peak; it was 48 percent last month. But Turks have endured a bitter cost-of-living crisis, watching their savings dwindle and prices rise as the lira has lost more than 80 percent of its value against the dollar since 2018.
Mr. Erdogan, who defeated a stiff re-election challenge in May, has long insisted on curbing rising prices by lowering interest rates, which goes against widely held economic theory. In an attempt to boost Turks’ purchasing power ahead of spring elections, he has spent billions raising the minimum wage and raising public sector salaries.
Economists warn that Mr. Erdogan’s approach is exacerbating the country’s economic crisis, as most experts say interest rates should be raised to reduce rising inflation. During the election, Mr. Erdogan largely refused to budge.
After the campaign, however, he tapped a more conventional team to steer the country’s economy. He named Hafize Gaye Erkan — a Princeton-educated economist and the former co-chief executive officer of US-based First Republic Bank — to head the country’s central bank. Mehmet Simsek, a former top economist at Merrill Lynch, is back for another term as finance minister after being replaced by Mr. Erdogan nearly a decade ago.
Maya Senussi, an analyst at the Oxford Economics consulting group, called Thursday’s interest rate hike “an important step toward restoring credibility” that showed Ms. Erkan and his team are serious about fighting inflation. But more steps are needed to restore confidence in the lira, he said in a research note.
On Sunday, Ms. Erkan rolling brought back one of Mr.’s other heterodox initiatives. Erdogan — a costly plan that allows Turks to hold money in special inflation-proof lira accounts backed by the government. Announcing a series of regulatory changes, the central bank said it would seek to move away from such accounts.