Erdogan pledges support for higher interest rates

Turkish President Recep Tayyip Erdogan on Wednesday confirmed a major policy reversal by backing his new economic team’s decision to drastically hike interest rates to fight runaway inflation.

Erdogan has been a lifelong opponent of high borrowing costs and pushed past central bank governors to fight inflation with lower interest rates.

Conventional economics says high interest rates help bring down prices by tamping down demand and raising the cost of doing 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 September 21 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.

Source: AFP