(CTN News) – As part of its politically charged battle against historically high inflation rates, Turkey’s central bank raised its policy rate for the fifth month in a row on Thursday, making it the first time in its history to do so.
In a statement, the bank explained that it was raising its main lending rate from 30 percent to 35 percent as “inflation readings over the past three months have exceeded expectations.”.
As of last month, Turkey’s official annual inflation rate had climbed back above 60 percent after peaking at 85 percent in October.
Since President Recep Tayyip Erdogan dropped – or at least put aside – his lifelong objection to the idea that raising interest rates is one way to fight inflation, the Turkish central bank has increased borrowing costs by more than quadrupled.
During a difficult May election campaign, the Turkish president had made a vow that he would never allow the Turkish central bank to raise its key rate during his presidency.
In the wake of Erdogan’s victory, he reversed course and allowed a new team of Wall Street-trained economists to take on the task of steering the country out of its worst cost-of-living crisis in two decades of his rule.
In the past few months, Erdogan has given several crucial votes of support to his new policy team.
The head of the ruling party, on Wednesday, told the faithful of his party that Turkey was waging a “multifaceted battle against inflation”.
During a televised speech, he pointed out that it takes time for actions taken to improve the economy to have a positive impact on the daily lives of people.
Depreciation managed in a systematic manner
Two years ago, Erdogan started Turkey’s latest economic crisis by instructing the central bank to start slashing borrowing costs in an attempt to combat inflation. That led to the country’s latest economic crisis.
It was not long before the Turkish lira began to crash as Turks began to stockpile dollars and gold in order to preserve their savings and protect themselves from further economic shocks as well.
It is estimated that since Erdogan started his economic experiment several years ago, the central bank has spent well over $200 billion dollars trying to prop up the lira.
As part of the post-election policy shift, the central bank has decided to allow the value of the Turkish Lira to weaken in order to ease the pressure on the coffers of the central bank.
According to analysts, the lira interventions have also started to erode the competitiveness of Turkish exports to Europe and other parts of the world as a result of the interventions in the lira.
The Turkish lira has dropped from 20 to the dollar at the time of Erdogan’s re-election to around 28.1 to the greenback as of Thursday.
It appears that the (central bank) is currently keeping the lira under a managed depreciation regime, with a target of around 30.00 at the end of the year, according to ING Bank in a client note.