Erdoganomics abandoned after interest hikes

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Turkey’s Central Bank cemented the country’s policy shift with a super-sized rate hike, raising its key interest rate by a lofty 500 basis points to 30%.

The latest hike marks a second month of aggressive tightening after President Tayyip Erdogan set aside his long opposition to tight fiscal policy.

It has raised rates by 2,150 basis points since June.

Announcing the increase, Turkey’s Central Bank warned it is ready to raise rates as needed to rein in inflation that leapt to 59% in August and is expected to rise into next year.

The central bank said the policy “will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved”.

After the decision, the lira slipped to 27.105 to the dollar, just shy of its all-time low touched last month.

The fourth rate hike in as many months “is probably not enough to convince investors that inflation is being controlled,” James Wilson, EM sovereign strategist at ING, told Reuters.

“We expect further rate hikes will be needed before the end of the year, although the overall direction of policy towards a more hawkish bias should, in general, be taken as a positive by investors.”

Turkey’s Central Bank’s decision sets aside Erdoganomics, President Erdogan’s persistence to clamp down on high-interest rates despite high inflation.

Previously, Erdogan had supported a low-interest rate policy, which triggered a currency crisis in late 2021 and pushed inflation above 85% last year.

Partly due to lira depreciation, annual consumer price inflation is seen rising to around 60% by year-end.

Since 2018, he has repeatedly described himself as an “enemy” of “evil” interest rates.

Erdogan was re-elected in May, stepping into his third decade at Turkey’s helm.

Following his re-election, Erdogan appointed former Wall Street banker Hafize Gaye Erkan to lead the central bank in June as authorities grappled with an economy strained by depleted FX reserves and soaring inflation expectations.

In August, the bank shocked with a 750-point hike that signalled a new determination to battle inflation.

Rates rose three times more than expected and sparked the biggest single-day lira rally since 2021.

Two weeks after the shocking interest push, Erdogan said tight monetary policy would help bring down inflation.

The lira has weakened nearly 70% in two years, primarily due to Erdogan’s long-standing opposition to high rates and influence over the central bank.

It dropped again this summer as the new economic team loosened the state’s grip on forex markets and began shedding unorthodox policies and regulations.