Turkey’s central bank hikes its key interest rate to an unprecedented 50 per cent

In an effort to combat surging inflation, Turkey’s central bank has raised its key interest rate to an unprecedented 50 per cent, as reported by AP News. This unexpected move is aimed at addressing the severe economic difficulties faced by households grappling with soaring prices for essential goods and services.

The decision to hike the interest rate comes in response to the worsening inflation outlook, with annual consumer price inflation reaching 67 per cent in February. The rapid increase in prices has placed significant financial strain on many families, making it increasingly challenging for them to afford basic necessities such as food, rent, and utilities.

The central bank emphasized that a “tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed.”

President Recep Tayyip Erdogan, known for advocating unconventional economic theories that support lower interest rates to control inflation, has faced criticism for his policies. His strategy of reducing interest rates initially resulted in double-digit inflation and a currency crisis. However, following his re-election last May, Erdogan changed course and appointed a new economic team, which subsequently raised the benchmark interest rate from 8.5 per cent in June to 45 per cent in January.

Despite previous rate hikes, Bartosz Sawicki, a market analyst at Conotoxia, highlighted that the Turkish central bank was compelled to further increase the one-week repo rate from 45 per cent to 50 per cent. Sawicki noted that the rate hikes initiated since the 2023 presidential elections were insufficient to address the economic imbalances resulting from years of unorthodox policies.

The Turkish lira, which has depreciated by approximately 40 per cent against the US dollar over the past year, showed signs of recovery following the central bank’s latest decision. This rate hike is intended to restore confidence in the currency and stabilize the financial market amid ongoing economic challenges.