Turkey central bank raises rates for the first time since 2021 in U-turn.
The Central Bank of Turkey raised interest rates to 15%, from 8.5%. This pushed borrowing costs to their highest levels since late 2021. This is a stark turnaround of policy from President Tayyip Edogan's unorthodox economic policies, which saw rate cuts in the face of higher inflation.
In effect, the new economic administration of Hafize Gaye Erkan as the head of Turkey's central bank, and Mehmet Simsek as the new Treasury and Finance Minister have embarked on a dramatic U-turn of recent policy. This is the first rate hike since March 2021.
Previous policy saw Turkey lowering its policy rate from 19% in late 2021 to 8.5% in March 2023. This, despite the fact that inflations was running rampant. Conventional economic theory suggests the opposite - that rates should be hiked to cool ballooning inflation. As a result, the Turkish lira has plummeted, losing about 80% of its value to the dollar over a five-year period.
It is noteworthy that despite the hefty 6.5% rate increase, this was still lower than forecast. The market was expecting a 12.5% increase to 21%. As a result, the market was somewhat disappointed and the USDTRY spiked upwards (blue arrow), with the lira losing more ground to the greenback.
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Russell Shor
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.
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