Turkey Announces Another Major Interest Rate Hike

Turkey's central bank this week surprised the marketswith a bigger-than-expected interest hike as it revved up its battle against inflation as it tries to support the slumping lira.

The central bank hiked its policy rate by 5 percentage points to 40%, half a year into a monetary-tightening cycle that has increased borrowing costs fourfold.

Most economists had expected the central bank to hikeits rate by 2.5 percentage points. But the bank also gave a strong signal that it was reaching the high point of its tightening cycle.

Turkey's interest rates are now the highest of President Recep Tayyip Erdogan's twenty years in power, comfortably higher than those in almost all other emerging economies in the world.

Analysts expect that rates will stay high at least through the middle of next year. The country’s official annual inflation rate peaked at 85% in October 2022 and climbed back up to 61% last month.

The Turkish lira has shed more than 70% of its value against the dollar since Erdogan began to unleash his unconventional experiment to keep interest rates low in the face of high inflation just over two years ago.

This approach drew fierce critics as it confounded conventional economics. Predictably, Turkey’s inflation skyrocketed as a result of these actions, spooking investors. Erdogan has since changed direction and installed a new team of market-friendly economists who are behind the latest interest rate hike.