The Turkish central bank has raised the key interest rate significantly and thus initiated a change in its previous monetary policy under new leadership. The central bank in Ankara announced that the key interest rate would be increased from 8.5 to 15 percent. The move marks a change of course after Turkish President Recep Tayyip Erdogan installed former US banker Hafize Gaye Erkan as central bank governor.
In the past, Erdogan had repeatedly spoken out in favor of falling interest rates because, in his opinion, this was the only way to win the fight against high inflation. However, this not only contradicts current economic theory, but also practical knowledge from the past.
The Turkish lira has been under pressure for years, the country’s economy is ailing and inflation is high. Most recently, inflation was just under 40 percent. Last year it had reached up to 85 percent and thus the highest level for more than 20 years. The central bank has now announced that monetary policy will be further tightened until there is a significant improvement in the inflation outlook.
Erdogan now apparently wants to regain confidence in the financial markets with his new economic team. After his re-election in May, the head of state appointed the internationally renowned expert Mehmet Simsek to the new cabinet as finance minister. Cevdet Yilmaz was appointed Vice-President, he is also considered to represent a traditional economic policy.
