Inflation-battered Turkey hikes key rate to 20-yr high

Published : 23 Sep 2023 08:36 PM

Turkey's central bank on Thursday raised its key lending rate to a 20-year high following a sudden turn towards conventional economics by President Recep Tayyip Erdogan.

The bank lifted its policy rate to 30 percent from 25 percent and promised more belt-tightening measures in the future.

It followed a new surge in inflation that came in partial response to tax increases that Erdogan's government imposed to help pay for the vast spending pledges of his May re-election campaign.

"Inflation was above expectations in July and August," the bank said in statement. "Attaining price stability is our top priority," Turkey's new Wall-Street trained finance chief Mehmet Sismek declared on social media.

The mercurial Erdogan performed one of his trademark policy reversals after winning the May campaign.

The vote came during Turkey's worst economic crisis in decades -- one that analysts universally blamed on Erdogan's unorthodox conviction that high interest rates contribute to inflation.

Erdogan called high rates "the mother and father of all evil" and spent years pushing the central bank to lower borrowing costs to speed up economic growth.

He also made low rates the mantra of his re-election campaign.

But the annual inflation rate is again rising after officially peaking at 85 percent 11 months ago.

It approached 60 percent in August and is climbing much faster than projected by Erdogan's new economic team of respected technocrats.

That team has been widely applauded for convincing Erdogan that Turkey would enter a systemic crisis unless rates were immediately and substantially raised.

The policy rate has now more than trippled from the 8.5 percent at the time of Erdogan's re-election campaign.

- Brighter outlook -

Economists still worry that Turkey is flirting with disaster because interest rates remain far below levels at which consumer prices are going up.

This gives Turks the incentive to spend their savings before they lose value and is making the economy overheat.

"Turkey's economy isn't slowing anywhere near as quickly as we thought it would a few months ago," Capital Economics consultancy analyst Liam Peach wrote this month.

Fitch Ratings this month improved Turkey's outlook from "negative" to "stable" thanks to the policy U-turn.

But it also warned that "there is still uncertainty regarding the magnitude, longevity and success of the policy adjustment to bring down inflation, partly due to political considerations".

Simsek expects to keep rates elevated until the middle of next year.

"Starting from the second half of 2024, we will be discussing lowering interest rates," he said this month.

But Simsek has a second major problem.