Turkey's central bank on Thursday raised its key interest rate by five percentage points, now set at 30%, in an attempt to stem rebounding inflation. This rate, capped at 8.5% in June, has now reached a level not seen since 2003 in Turkey, a country in the grip of a severe economic crisis.
Acknowledging that "inflation was higher than expected in July and August" due in particular to the surge in oil prices, the Turkish central bank announces further rate hikes in the coming months, "until a significant improvement in the inflation outlook". But this expected increase -- the fourth in a row -- is still considered insufficient by many: inflation accelerated to 58.9% year-on-year in August after falling to 38.2% in June, starting again towards the peaks of October 2022 (85.5%), well above the level of rates granted to individuals.
Such a sharp increase in key rates was science fiction just five months ago: President Recep Tayyip Erdogan, then campaigning for re-election, continued to support the reduction of key rates, prioritizing growth and employment over price stability. The Turkish head of state, who claims against conventional economic theories that high interest rates promote inflation, has however changed his position in recent months, leaving his new economic team since June to return to more conventional policies. "We will bring inflation back to single digits with a restrictive monetary policy," he said in early September, seeming to have acknowledged the need for further rate hikes.
Economists, however, continue to worry about Turkey's economy overheating, with current interest rates, still well below inflation, prompting consumers to spend their money quickly. "The Turkish economy is not slowing down as fast as we thought a few months ago," wrote Liam Peach, an analyst at Capital Economics. The same analyst said Thursday that the key rate will reach "at least 35% at the end of the year". The ratings agency Fitch raised its outlook for Turkey from "negative" to "stable" in early September, welcoming the return to a "more conventional and coherent policy". Fitch believes, however, that "uncertainty remains about the magnitude, longevity and success of policy adjustment to reduce inflation, partly due to political considerations."
Turkish Economy Minister Mehmet Simsek, whose appointment in early June was welcomed by investors, ruled out any rate cut by the second half of 2024. But the Minister of Economy will have to deal with another major problem: Turkey's finances are weighed down by a banking mechanism covering the depreciation of bank deposits in Turkish lira against the dollar, the euro or the British pound. The expected dismantling of this mechanism launched at the end of 2021 could encourage savers to convert their savings into foreign currencies and plunge even further the Turkish lira, which has already lost nearly 80% of its value in five years against the dollar.
Early Thursday afternoon (11:30 GMT), the currency was trading around 27 Turkish liras for a dollar, almost stable. Economist Timothy Ash called this mechanism "an unpinned grenade placed in Mehmet Simsek's pocket by the outgoing team."