Turkey's central bank raised its key interest rate by 2.5 percentage points to 17.5% to tackle high inflation in the country. The rate hike comes as part of Turkey's efforts to overhaul its economic policies after President Erdogan's reelection in May.
The central bank cited several reasons for the rate increase:
• Inflation continues to remain high, driven by domestic demand, exchange rates, and pricing behavior.
• Tax regulations and prices are putting further pressure on inflation.
• The central bank needs to create favorable monetary conditions to reduce inflation to its 5% target in the medium term.
• The central bank will continue its monetary tightening as needed until a significant improvement in the inflation outlook is achieved.
The rate hike signals Turkey's shift toward more "rational" economic policies under its new finance minister, aiming to restore credibility and attract foreign investment.
Previously, President Erdogan had pushed for lower interest rates, believing they fueled inflation. However, this unorthodox approach contributed to the lira's depreciation and high inflation.
After earthquakes hit Turkey in February and caused significant damage, President Erdogan launched a salary support program to protect workers and businesses in affected areas. However, the economic fallout from the earthquakes, combined with Turkey's struggling currency, weighed on the economy.
The latest interest rate increase aims to support the lira and bring inflation under control, indicating Turkey's commitment to rebuilding investor confidence and stabilizing its economy.
