Turkey raised interest rates for the second consecutive month in an effort to control inflation

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Turkey’s central bank raised borrowing costs for the second time in as many months as the country steps up its fight against inflation and gradually winds down its low-rate policy that has plagued its economy.

Policymakers raised the one-week repo rate by 2.5 percentage points to 17.5 percent. According to a survey by the central bank ahead of Thursday’s decision, local businesses were expecting a 20 percent increase.

The interest rate hike is the latest sign of how Turkey is shifting its economic policies after President Recep Tayyip Erdoğan was re-elected in May. New finance minister Mehmet Simsek has vowed to restore “rational” policies after years of unorthodox measures adopted by Erdoğan, including an emphasis on keeping rates low, slashing fast-rising inflation and a huge trade deficit.

“The committee decided to continue with the monetary tightening process to establish a deflationary course as soon as possible, moderate inflation expectations and moderate the fall in pricing behaviour,” the central bank said on Thursday.

Hafez Gay Erkan, a former Wall Street banker, was chosen to lead the central bank in June. The central bank soon raised rates from 8.5 percent to 15 percent and promised to “continue the process of monetary tightening until there is a significant improvement in the inflation outlook”.

Some analysts worry that Erdoğan, who has been a lifelong opponent of high interest rates, will not allow the central bank to raise rates so high to control inflation, especially with key local elections due early next year. Some members of Erdoğan’s ruling Justice and Development Party have also criticized the new economic policy.

Turkey has taken a series of other steps in recent weeks aimed at easing domestic demand and replenishing state coffers amid huge pre-election gifts and a major effort to rebuild vast swathes of the country’s south that were devastated in February. Earthquake The government recently tripled petrol taxes after increasing Value Added Tax on a wide range of goods and services.

Ankara has also backed away from defending the lira, which has severely depleted Turkey’s foreign exchange reserves. As a result, the currency has fallen by more than a fifth to its record low of TL27 against the dollar since the beginning of June.

Economists say a weaker lira, which makes imports more expensive, and tax increases will trigger a new round of inflation. According to a central bank survey, local business officials expect inflation to rise to 45 percent by the end of this year from about 38 percent in June. Bank of America said this week that it expects inflation to reach 65 percent by May 2024.

Nevertheless, there are early signs that the new policies are beginning to bear fruit. Turkey’s foreign exchange reserves have risen by $14 billion since late May, while foreign investors, who have largely dumped Turkey’s financial assets in recent years, pumped $1.3 billion into equity markets in the five weeks to July 7. have invested.

Saudi Arabia and the United Arab Emirates also pledged new investments in Turkey this week as Erdogan embarked on a tour of the Gulf region. ADQ, one of Abu Dhabi’s state investment funds, also said it would provide up to $8.5 billion through bonds to support reconstruction efforts after the quake.