In a significant shift in Turkey’s monetary policy, the country’s central bank raised its main interest rate to 15% after two years of implementing unconventional economic measures pushed by President Recep Tayyip Erdogan. This decision was made at the first monetary policy meeting after Erdogan’s re-election in May and represents a considerable increase from the previous 8.5%.
The aim of this move is to carry out a “monetary tightening to set the course of disinflation as soon as possible,” the central bank announced in a statement. Although Erdogan stated last week that his conviction to cut interest rates had not changed, he hinted at his approval for this increase.
Analysts believe that this significant increase in the main interest rate could help improve the Turkish economy. Erdogan, unlike classical economic theories, believes that high interest rates encourage inflation. For the past two years, he has forced the Turkish central bank to cut rates as part of a “new economic model.” However, this strategy contributed to the rise in inflation, which in May was below 40% for the first time in sixteen months, according to official data. It also led to the depreciation of the Turkish lira, which has lost more than 80% of its value against the dollar in five years.
Since his re-election, Erdogan has signaled a possible return to more conventional policies, as evidenced by the appointments of Mehmet Simsek, a former Merrill Lynch economist, as Economy Minister and Hafize Gaye Erkan, a former Wall Street executive, as head of the central bank. These changes could indicate an attempt to address the economic challenges facing Turkey and seek more traditional solutions.