In view of the high inflation, the Turkish central bank has raised the key interest rate to 25 percent in an unexpectedly large step. It was the third rate hike in a row.
The Turkish central bank is raising the key interest rate by 7.5 percentage points to 25.0 percent, as the central bank announced today after its monetary policy meeting. The financial markets were surprised by this significant increase: on average, economists had only expected an increase to 20 percent.
However, the key interest rate is still below the inflation rate, which rose to almost 50 percent in July. With the big hike in interest rates, the central bankers are therefore likely to have tried to underpin their determination in the fight against high inflation.
Further rate hikes are likely to follow
According to the statement by the central bank, the intention is to use the decision to herald a process of falling inflation rates and anchor inflation expectations. She promised further rate hikes. Monetary policy will be further tightened until a significant improvement in the inflation outlook is achieved, the central bank reiterated statements made at its previous meeting.
In June, the currency watchdogs under their new boss Hafize Gaye Erkan initiated the change in monetary policy and raised the key interest rate for the first time in a long time. The key interest rate had previously been cut to 8.5 percent, even though inflation in the country had risen to 85 percent in 2022.
Experts referred to political pressure from President Recep Tayyip Erdogan, who is a principled opponent of high interest rates. So far, however, he seems to be granting the new central bank leadership more freedom.
Turkish lira increases
The Turkish lira appreciated noticeably against the euro and dollar following the interest rate hike, reaching its highest level against both currencies since mid-July. However, the local currency recovered only a very small part of the losses it had suffered since May. After the decision, the euro exchange rate fell to 29.1 lira. However, at the end of May only around 22 lira had to be paid for one euro.
The extremely loose monetary policy of the Turkish central bank had weakened the lira considerably in recent years. The weak lira makes imports into Turkey more expensive and also drives inflation.