Turkey's Central Bank Raises Interest Rates To 40%

Türkiye's central bank has raised its main interest rate to 40% as part of a concerted campaign to tackle soaring inflation in the country.

The rise, from the previous rate of 35%, was much greater than expected.

But Türkiye's central bank suggested rates were approaching the level required to start lowering inflation.

According to BBC, the Consumer Price Index (CPI) in Türkiye was reported to be 61.36% in October 2022, the highest rate in 24 years. Forecasts from the Central Bank of the Republic of Türkiye predict that inflation will continue to increase, peaking in May 2023 at an estimated 70 to 75%. 

While central banks globally have raised interest rates in an attempt to slow rising prices, President Recep Tayyip Erdoğan had resisted economic orthodoxy previously, arguing that higher rates would cause prices to rise.

However, since his re-election in May, his stance has changed.

Under the leadership of the new central bank governor, Hafize Gaye Erkan, a former Wall Street banker, the Central Bank of the Republic of Türkiye has been allowed to increase interest rates significantly, from 8.5% to 40%. This increase in interest rates is intended to make borrowing more expensive and slow down the rate of inflation. 

"The pace of monetary tightening will slow down and the tightening cycle will be completed in a short period of time," the central bank said.

It added interest rates would stay at a high level for "as long as needed to ensure sustained price stability".

Türkiye's economy grew dramatically in the early years of President Erdoğan's leadership, but in recent years has struggled.

The central bank's previous policy of cutting interest rates despite high inflation triggered a currency crisis in 2021. It led  the government to introduce a scheme to protect lira deposits from currency depreciation.

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