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Turkey's Central Bank hikes interest rate to 15 percent to tackle inflation

Turkish lira falls 2.5 percent to 24 to the dollar, a record low
Turkey's Central Bank has increased interest rates from 8.5 percent to 15 percent to counter sky-high inflation (Anadolu Agency/File photo)
By Ragip Soylu in Ankara

Turkey's Central Bank has increased interest rates from 8.5 percent to 15 percent to counter sky-high inflation.

Following the decision, the Turkish lira dropped 2.5 percent to its weakest on record against the US dollar, exceeding 24 lira per dollar.

The monetary policy committee made the decision on Thursday as part of a process to "establish disinflation as soon as possible", the central bank said in a statement.

It added that tightening measure would continue "as and when necessary" until there was a "significant improvement in the inflation outlook". 

The inflation rate in Turkey, which soared to 85 percent in December, curently stands at around 40 percent. 

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In recent years, President Recep Tayyip Erdogan has subscribed to an unorthodox economic theory that high interest rates cause inflation.

He had previously pressured the Central Bank to cut borrowing costs and increase credit access, despite conventional wisdom saying otherwise. 

The lira has shed more than 90 percent of its value over the past decade, and the country's soaring inflation has driven away foreign investors.

'Not enough'

In a bid to turn around the country's economic fortunes, Erdogan appointed a new economic team following last month's pivitol election.

Internationally respected ex-banker and former finance minister Mehmet Simsek was appointed as treasury and finance minister.

Turkey: How Mehmet Simsek convinced Erdogan to drop his low interest rate policy
Read More »

Earlier this week, the government announced an increase to the monthly minimum wage to about $483 as part of an effort to ease the impact of inflation. 

Simsek and Vice President Cevdet Yilmaz are visiting the United Arab Emirates on Thursday to seek investment for Turkish markets, two sources familiar with the trip told Middle East Eye.

Tim Ash, a long-term investor in Turkey, said on Twitter that the Turkish Central Bank disappointed the markets with an insufficient hike.

“With inflation at 40 percent, that’s just not enough to convince,” he said.

Ash said he doubted that promises of future rate hikes by Central Bank Governor Hafize Gaye Erkan would please the markets, which he said would recall how her predecessor Naci Agbal tried to gradually raise rates only to be fired in 2021.

Many global investment banks expected aggressive hikes, taking the benchmark rate to something between 20 to 40 percent.

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