Turkey's 61% inflation forces central bank to hike interest rate to 40%

Turkey’s central bank implemented another substantial interest rate hike on Thursday in its ongoing effort to tackle double-digit inflation, which has placed a financial burden on households struggling with the cost of essential goods, including food.

The bank increased its policy rate by 5 percentage points, reaching 40 per cent. This marks the sixth consecutive significant interest rate hike aimed at combating inflation, which reached a staggering 61.36 per cent last month, according to The Associated Press.

President Recep Tayyip Erdogan has consistently supported an unconventional strategy of lowering interest rates to address inflation, leading to the dismissal of central bank governors who opposed his rate-reduction approach.

This unconventional approach has been widely criticised, with many attributing economic challenges, such as a currency crisis and a rising cost of living, to Erdogan’s policies, which deviate from conventional economic wisdom.

In contrast to Erdogan’s approach, central banks worldwide have swiftly raised interest rates to address surges in consumer prices resulting from the post-COVID-19 pandemic recovery and the conflict in Ukraine.

Following Erdogan’s reelection in May, he appointed a new economic team that has rapidly shifted away from his previous policy of maintaining low interest rates.

The team, including former Merrill Lynch banker Mehmet Simsek as finance minister (a position he held until 2018) and Hafize Gaye Erkan, a former US-based bank executive who assumed the role of central bank governor in June, has played a key role in reversing the previous policy.

Under Erkan’s leadership, the central bank has increased its main interest rate from 8.5 per cent to the current 40 per cent.

With inputs from agencies