Inflation Soars As Turkish Central Bank Raises Key Interest Rate To 50%

(CTN News) – A five percentage point increase in the key interest rate was announced by Turkey’s central bank on Thursday, resuming a policy of rate hikes to combat the soaring inflation that is severely straining households’ economic circumstances.

A surprise announcement from the central bank led to the raising of the benchmark rate on one-week repo loans to 50% in a surprise move. Prior to the May 31st mayoral elections, it was widely expected that the Bank of England would maintain its benchmark interest rate for a second month.

In accordance with the bank’s statement, a tight monetary stance would be maintained until a significant and sustained decline in the underlying trend of monthly inflation could be observed.

There was an increase in annual inflation of consumer prices in February, rising to 67%, which was above expectations. In the midst of spiraling prices, many families are struggling to afford food, rent, and utilities on a day-to-day basis.

Throughout his political career, President Recep Tayyip Erdogan has espoused an unorthodox economic policy of slashing interest rates in order to tame inflation, a theory that runs counter to conventional economic thinking in that it is contrary to conventional economic principles. Following Erdogan’s reelection in May, he reversed course after a series of rate cuts by the central bank caused double-digit inflation and a currency crisis until a new economic team was appointed in June following a series of rate cuts by the central bank.

The central bank halted the rate hikes last month, which had been planned by the new team, after raising the benchmark interest rate from 8.5% in June to 45% in January under the previous team.

In a note emailed to Conotoxia, Bartosz Sawicki, a market analyst with Conotoxia, noted that despite the fact that the Turkish central bank declared the end of the tightening cycle in January, the Turkish central bank was forced to raise the one-week repo rate from 45% to 50% because of the upcoming election.

As Sawicki emphasized, the rate hikes since the May 2018 presidential election have not been sufficient to correct imbalances that have arisen as a result of the irresponsible, unorthodox policies that have been followed for years.

In the wake of Thursday’s decision, the Turkish currency, which has lost around 40% of its value against the dollar in the last year, has started to recover some of its lost ground.

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