It seems that unorthodox practices of Turkish central bank are over

The Turkish central bank has raised the interest rate in the country from 8.5 to 15 percent to combat soaring inflation. The almost doubling of the rate may seem significant, but economists had expected an increase to 21 percent. The hike represents a remarkable policy shift by the Turkish central bank and the government.

The rate hike is a 180-degree turn in Turkey’s monetary policy, which in recent years has been characterised by unconventionally low interest rates. The Turkish central bank, under pressure from President Recep Tayyip Erdogan, consistently cut interest rates when consumer prices started to rise hard.
Unconventional view

It is common for a central bank to raise interest rates to fight inflation, but Erdogan thought otherwise. Consequently, interest rates remained low for years, with the inevitable result that the Turkish lira depreciated sharply and inflation eventually yawped to the 85 per cent mark last year.

Turkish inflation, meanwhile, declined to around 40 per cent in May. This was not so much because of prudent monetary policy, but because of all the douches the president threw around to get re-elected. For instance, he gave households a month of free gas and increased civil servants’ salaries shortly before the election.
Hafize Gaye Erkan

Last month, however, Erdogan signalled his intention to return to more conventional economic policies and appointed a new central bank governor, Hafize Gaye Erkan, making her the first female governor of the central bank. She previously worked for US investment bank Goldman Sachs and between 2014 and 2021 was one of the senior directors of First Republic Bank, which toppled this year. In short: someone who does know that interest rates should go up in the face of inflation.

Strong domestic demand, cost pressures and the persistence of services inflation were the main drivers, the central bank said in a statement. In it, the central bank also explains that higher interest rates should curb inflation “as soon as possible” and that this will be continued gradually “until inflation prospects have improved significantly”.

Whether Erkan will stay in office for long remains to be seen, Erdogan has appointed a new central bank governor five times in the past four years. The last governor who dared to raise interest rates, Naci Agbal, was sacked in 2021 – cold five months after taking office.

Turkey also now has a new finance minister, the widely respected former banker Mehmet Simsek. Simsek announced earlier that he will fight inflation “on rational grounds”, which is hopeful that Turkey is heading towards a normalised economic course.