In an effort to combat the country’s skyrocketing inflation, the principal interest rate of the Turkish central bank has been increased to 40%.
In comparison to the prior rate of 35%, the increase was considerably more substantial.
However, the Turkish central bank indicated that interest rates were approaching the threshold necessary to begin reducing inflation.
The inflation rate, which quantifies the acceleration of price increases, peaked at 61.36 percent in October and is projected to continue climbing until it reaches a zenith of 70 to 75 percent in May of next year.
In contrast to the approach taken by central banks worldwide to curb inflationary pressures through interest rate hikes, President Recep Tayyip Erdogan had previously opposed economic orthodoxy on the grounds that higher rates would, in fact, induce price increases.
Since his re-election in May, he has adopted a different position.
Central Bank’s Aggressive Approach under New Chief
Under its new chief, Hafize Gaye Erkan, a former Wall Street banker, the central bank has been authorised to increase interest rates from 8.5 percent to 40 percent in an effort to increase the cost of borrowing and halt price increases.
The central bank stated that monetary tightening will decelerate, and the tightening cycle will conclude within a brief time frame.
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It further stated that interest rates would remain elevated “for the duration required to guarantee ongoing price stability.”
Turkey’s economy experienced substantial growth during the initial years of President Erdogan’s tenure but has encountered challenges in recent times.
The 2021 currency crisis was caused by the central bank’s interest rate cuts despite high inflation. As a result, the government implemented a programme to safeguard lira deposits against the depreciation of the currency.
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