Turkey’s central bank ends low rate era with hike of 6.5 percentage points

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Turkey nearly doubled its key interest rate as the central bank’s new leadership took the first steps to dismantle politically motivated policies that fueled inflation and forced foreign investors to flee.

The central bank, led by newly appointed governor Hafez Gay Erkan, raised its benchmark one-week repo rate to 15 percent from 8.5 percent on Thursday.

Local business officials and international investment banks had expected a large increase in borrowing costs of around 20 percent. The lira fell 2.9 percent to a new record low of 24.24 against the dollar after the decision, according to FactSet data.

“The rate hike is lower than expectations, but it can be considered the first of many steps,” said Enver Erkan, chief economist at Istanbul-based brokerage Dinamic Yatirim Menkul Degerlar.

Central bank watchers are betting on a change in stance from the low-rate policies implemented by President Recep Tayyip Erdoğan since the May presidential election, in which Erdoğan won.

Their optimism has been boosted by the president’s appointment of investor-friendly former deputy prime minister Mehmet Simcek as finance minister and former Goldman Sachs executive Erkan as central bank chief.

Inflation has peaked above 85 percent due to the low rates implemented in the last two years. Inflation still remains below 40 per cent.

Rate setters hinted at further hikes in the coming months, saying they would tighten policy “in a timely and gradual manner until a significant improvement in the inflation outlook is achieved”.

A series of rate cuts through 2021 has pushed the lira to a record low against the dollar and created serious imbalances in the $900 billion economy.

The loose monetary policy, in addition to government relaxations ahead of the May elections, has prompted many economists to say that Turkey’s economy is running too hot. While higher rates will help slow activity, the announced scale-up increase is unlikely to have a dramatic impact.

Dinamic’s Erkan noted that rates paid on commercial loans and bank deposits were already significantly higher than the new central bank policy rate.

While Thursday’s move marked a shift toward more traditional policies, investors cautioned that Erdoğan, who has led Turkey for two decades, has gone down this path before only to change direction.

Former central bank governor Nassy Agbal was sacked in early 2021, just months into her term, after raising borrowing costs.

Get FREE Türkiye Economy Updates

we will send you one myFT Daily Digest Latest Email Rounding turkish economy News every morning.

Turkey nearly doubled its key interest rate as the central bank’s new leadership took the first steps to dismantle politically motivated policies that fueled inflation and forced foreign investors to flee.

The central bank, led by newly appointed governor Hafez Gay Erkan, raised its benchmark one-week repo rate to 15 percent from 8.5 percent on Thursday.

Local business officials and international investment banks had expected a large increase in borrowing costs of around 20 percent. The lira fell 2.9 percent to a new record low of 24.24 against the dollar after the decision, according to FactSet data.

“The rate hike is lower than expectations, but it can be considered the first of many steps,” said Enver Erkan, chief economist at Istanbul-based brokerage Dinamic Yatirim Menkul Degerlar.

Central bank watchers are betting on a change in stance from the low-rate policies implemented by President Recep Tayyip Erdoğan since the May presidential election, in which Erdoğan won.

Their optimism has been boosted by the president’s appointment of investor-friendly former deputy prime minister Mehmet Simcek as finance minister and former Goldman Sachs executive Erkan as central bank chief.

Inflation has peaked above 85 percent due to the low rates implemented in the last two years. Inflation still remains below 40 per cent.

Rate setters hinted at further hikes in the coming months, saying they would tighten policy “in a timely and gradual manner until a significant improvement in the inflation outlook is achieved”.

A series of rate cuts through 2021 has pushed the lira to a record low against the dollar and created serious imbalances in the $900 billion economy.

The loose monetary policy, in addition to government relaxations ahead of the May elections, has prompted many economists to say that Turkey’s economy is running too hot. While higher rates will help slow activity, the announced scale-up increase is unlikely to have a dramatic impact.

Dinamic’s Erkan noted that rates paid on commercial loans and bank deposits were already significantly higher than the new central bank policy rate.

While Thursday’s move marked a shift toward more traditional policies, investors cautioned that Erdoğan, who has led Turkey for two decades, has gone down this path before only to change direction.

Former central bank governor Nassy Agbal was sacked in early 2021, just months into her term, after raising borrowing costs.