Turkey’s central bank raised the country’s key interest rate on Thursday, nearly doubling it from 8.5 percent to 15 percent, as the new economic administration of newly re-elected President Recep Tayyip Erdogan embarked on a sharp turnaround in monetary policy, CNBC reported, according to a report by CNBC. News.ro.

The bank said that there will be a gradual tightening of monetary policy until the level of inflation in the country improves. The huge 6.5 percentage point interest rate hike was the country’s first since March 2021, but it was below analysts’ expectations for an 11.5 percentage point rise to 20%.

“The committee decided to start the process of tightening monetary policy to set a course for reducing inflation as soon as possible, anchor inflation expectations and control the deterioration of price behavior,” the central bank, led by new governor Hafiz Gaye Erkan, said in a statement. .

However, some analysts have criticized the central bank’s move as not going far enough.

Analysts say the base rate hike was cautious

“Oh, that’s disappointing. This is not enough. They had to do front growth. The market will not like that,” Timothy Ash, emerging markets strategist at BlueBay Asset Management, wrote in an email.

The Turkish lira fell to a record low of about 24.1 to the dollar, down from 23.54 before the decision was announced, according to Reuters data.

George Dyson, senior analyst at consultancy Control Risks, believes there will be further increases to bring the insurance rate to at least 20%.

“The Minister of Finance of Turkey, Mehmet Simsek, should be a little careful. I’m sure he’s worried about inadvertently causing a debt crisis by slowing the economy too quickly,” Dyson told CNBC.

Hamish Kinnear, senior Middle East and North Africa analyst at risk analytics firm Verisk Maplecroft, agreed.

“It’s a sign that the new governor is trying to tread carefully to avoid a clash with President Erdogan, the last central bank chief to raise interest rates was fired by the president after less than five months in office,” Kinnear recalled.

Erdogan’s economic policy has put Turkey’s economy in a tailspin

U-shaped monetary policy curve Turkey steadily cut its policy rate from 19% at the end of 2021 to 8.5% in March as inflation rose to over 80% at the end of 2022 and slowed to just under 40% in May.

Conventional economics believes that interest rates must be raised to reduce inflation, but Erdogan, a self-proclaimed “enemy” of interest rates who calls the instrument the “mother of all evils,” openly advocates a strategy of lowering them.

The result was a cost-of-living crisis for Turks as the country’s currency, the lira, collapsed.

The lira has lost about 80% of its value against the dollar over the past five years, and Turkey has found itself with poor foreign exchange reserves as it has sold billions of dollars to try to prop up its national currency.

On whom are the Turks hoping to fix their economy

The architect of Turkey’s attempt to return to economic orthodoxy is Simsek, Erdogan’s finance minister, who served as deputy prime minister and finance minister between 2009 and 2018 and is respected among investors.

After several years in which Erdogan exercised strong control over Turkey’s central bank, the president appears willing to give monetary policymakers more independence, at least for now.

“Erdogan agreed that short-term pain was necessary to revive the economy, and that perhaps empowering Simsek would play the markets well. The question will be how long Erdogan will endure this pain and whether public pressure will become too great to wrest control from Simsek. Erdogan will always be tempted to intervene again,” Dyson said.

Erdogan said in mid-June that his opposition to raising interest rates had not changed, but said he would respect Simsek’s decision to lower inflation.

“Some of our friends shouldn’t be wrong, like (asking) ‘Is our president going to make a major change in interest rate policy?’ But taking into account the opinion of our finance and finance minister, we agreed that he will take action quickly, comfortably with the central bank,” he told reporters at the time.