Turkey’s central bank unexpectedly allowed interest rates to rise sharply. While economists had expected interest rates to increase by 2.5 percentage points, to 20% in total, the central bank opted for an increase of 7.5 percentage points.
As a result, interest rates have risen three times since June. At that time the policy changed. While the interest rate cuts were mainly implemented under pressure from President Recep Tayyip Erdoğan, the new head of the Central Bank, Hafiz Cay Erkan, went ahead to increase interest rates. In June, she and her bankers decided to raise interest rates from 8.5% to 15%.
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Under Erdogan, a special strategy of lowering interest rates emerged, while inflation was very high. This goes against the conventional economic rules that higher interest rates actually slow inflation. Erdoğan’s extraordinary economic tactics did not work in his favour. Inflation peaked at no less than 85 percent last year. Inflation has now slowed, but it is still very high, at 48 percent in July.
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After winning the elections last May, Erdogan abandoned his controversial politics. Turkey’s new Finance Minister, Mehmet Simsek, also said that he wants to fight inflation on rational grounds.
