Turkey Raises Benchmark Interest Rate to 10.25%... First Time Since 2018 Currency Crisis (Update)

[Asia Economy Reporter Seolgina Jo] The Central Bank of Turkey raised its benchmark interest rate for the first time since the 2018 foreign exchange crisis. This move is interpreted as an effort to defend the exchange rate amid worsening economic conditions, including the Turkish lira hitting an all-time low against the dollar.

On the 24th (local time), the Central Bank of Turkey announced at its Monetary Policy Committee meeting that it raised the one-week repo (repurchase agreement) rate, the benchmark interest rate, to 10.25%. This is a 2.0 percentage point increase from the previous 8.25%. Market expectations had initially predicted a rate hold.

Since the appointment of Governor Murat Uysal in July last year, the Central Bank of Turkey had lowered the benchmark interest rate from 24% to 8.25% over nine cuts. The rate had been held steady from June to August.

However, this year, as the lira's value dropped more than 20% against the dollar and the central bank's exchange rate defense measures?buying lira in the foreign exchange market?led to a sharp decline in foreign exchange reserves, the bank finally resorted to the interest rate card. Bloomberg reported, "This is the first time Turkey has raised its benchmark interest rate since the 2018 foreign exchange crisis."

The Turkish economy is rapidly deteriorating due to the collapse of the lira and double-digit inflation. The current interest rate is far below last month's inflation rate in Turkey (11.77%). The Central Bank of Turkey's foreign exchange reserves have halved from $78 billion in January to $45.3 billion in September.

However, some analysts suggest that the interest rate hike decision by the central bank led by Governor Murat Uysal could lead to friction with Turkish President Recep Tayyip Erdogan, who is known as an opponent of high interest rates.

Previously, in 2018, when the central bank led by former Governor Murat Cetinkaya raised interest rates to 24% to defend the exchange rate amid the lira's collapse, President Erdogan expressed dissatisfaction, saying "high interest rates induce inflation." Cetinkaya, who openly refused the president's demand for rate cuts at the time, was eventually dismissed, and Murat Uysal, then deputy governor, was appointed as his successor.