Turkey’s central bank raised interest rates to 25 percent from 17.5 percent on Thursday, a big jump that underscored a shift by the country’s president, Recep Tayyip Erdogan, toward a more orthodox monetary policy to control inflation that exceeded an annual rate of 80 percent last year.
The size of the increase, which put the benchmark rate at its highest level since 2004, was bigger than expected, exceeding forecasts from financial analysts, who had predicted a more modest jump after July’s 2.5 percent rise.
After the announcement, the Turkish lira quickly rallied, briefly rising more than 7 percent against the U.S. dollar. It was trading at 25.6 per dollar by early evening in Turkey.
In a statement, the Turkish central bank said it had “decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior.”
Turkey’s official annual inflation rate has eased from last year’s highs, although it was 48 percent last month. But Turks have endured a bitter cost-of-living crisis, watching their savings erode and prices surge as the lira has lost more than 80 percent of its value against the dollar since 2018.
Mr. Erdogan, who beat back a tough re-election challenge in May, had long insisted on curbing rising prices by lowering interest rates, defying a widely-held economic theory. In an attempt to bolster Turks’ purchasing power ahead of the spring elections, he spent billions increasing the minimum wage and raising salaries in the public sector.
Economists warned that Mr. Erdogan’s approach was exacerbating the country’s economic crisis, as most experts say interest rates should be raised in order to tamp down rising inflation. During the election, Mr. Erdogan largely refused to budge.
After the campaign, however, he tapped a more conventional team to steer the country’s economy. He named Hafize Gaye Erkan — a Princeton-educated economist and the former co-chief executive officer of U.S.-based First Republic Bank — to lead the country’s central bank. Mehmet Simsek, a former top economist at Merrill Lynch, returned for another term as finance minister after being replaced by Mr. Erdogan nearly a decade ago.
Maya Senussi, an analyst at Oxford Economics consulting group, called Thursday’s interest rate increase “a vital step towards restoring credibility” that showed Ms. Erkan and her team were serious about fighting inflation. But more steps were needed to restore confidence in the lira, she said in a research note.
On Sunday, Ms. Erkan began rolling back one of Mr. Erdogan’s other heterodox initiatives — a costly plan that allowed Turks to hold money in special inflation-proof lira accounts backed by the government. Announcing a series of regulatory changes, the central bank said it would seek to transition away from such accounts.