Turkey’s Central Bank Hikes Policy Rate to 42.5% Amid Inflation Battle

Turkey’s central bank announced on Thursday an increase in its policy interest rate by 250 basis points, bringing it to 42.5%.

A policy interest rate is a tool used by central banks to control inflation and stabilize the economy by influencing the cost of borrowing money.

The central bank’s monetary policy committee stated, “Assessing that monetary tightness is significantly close to the level required to establish the disinflation course, the Committee reduced the pace of monetary tightening.” The committee plans to maintain this monetary tightness until sustained price stability is ensured.

This decision comes in the wake of President Recep Tayyip Erdoğan’s reelection in May, after which the administration shifted toward more traditional economic policies, ending the previous period of easing. The central bank began a tightening cycle following the appointments of Hafize Gaye Erkan as central bank governor and Mehmet Simsek as head of the Treasury and Finance Ministry in June, both seen as market-friendly figures.

Since June, the central bank has aggressively raised interest rates from 8.5% to 40% in an attempt to control persistent inflation. Despite these efforts, Turkish annual inflation in November remained high at over 61%, influenced by factors such as the government’s tax increase, reconstruction costs from February’s earthquakes, and other economic pressures.