Erdogan Vows to Back Increase in Interest Rates in Turkey

Turkish President Recep Tayyip Erdogan has given his support to a significant policy shift, endorsing his new economic team’s decision to significantly raise interest rates in an effort to combat soaring inflation.

Throughout his career, Erdogan has consistently voiced his opposition to high borrowing costs and has made it a priority to combat inflation by advocating for lower interest rates, even challenging central bank governors on the issue.

According to conventional economic theory, high interest rates play a role in decreasing prices by reducing demand and increasing the expenses of operating a business.

Analysts believe that Erdogan’s past policies helped spark a currency crisis that saw annual inflation hit 85 percent last year.

But he appointed a handful of Wall Street-trained veterans to steer the economy after nearly losing a May election because of Turkey’s dire economic malaise.

The central bank has since roughly trippled its policy rate to 25 percent.

Analysts believe it will need to raise the rate much higher at the next meeting on 21 September because the inflation has shot back up to nearly 60 percent.

Erdogan signalled clearly on Wednesday that he now supports higher interest rates.

“We will reduce inflation to single digits with the support of tight monetary policy,” he said in a nationally televised address announcing Turkey’s new medium-term economic programme.

“We have no doubt about achieving our goals.”

Some analysts felt that the central bank was refraining from raising its key rate faster out of fear of drawing Erdogan’s wrath.

Erdogan sparked a brief market panic by firing one central banker who tried to raise interest rates in late 2020 and early 2021.

He dismissed two others before then for fighting his unorthodox approach.