Turkey's Central Bank Raises Rates to 20-Year High in U-Turn, But Challenges Remain

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In a stunning reversal of policy, Turkey's central bank raised its key lending rate to a 20-year high of 30% on Thursday, signaling a shift towards conventional economics after years of unorthodox policies under President Recep Tayyip Erdoğan.

The move comes as Turkey grapples with its worst economic crisis in decades, with inflation soaring to nearly 60% in August. The sharp rise in prices has been driven by a number of factors, including the COVID-19 pandemic, the war in Ukraine, and Erdoğan's unorthodox economic policies.

For years, Erdoğan has resisted calls to raise interest rates, arguing that they would stifle economic growth. He has also been critical of the International Monetary Fund (IMF), which has urged Turkey to adopt more orthodox economic policies.

However, the recent surge in inflation has forced Erdoğan to change his tune. In recent weeks, he has repeatedly pledged support for "tight monetary policy" and has given his blessing to the central bank's rate hikes.

The central bank's move to raise rates is a welcome development for many economists, who have warned that Turkey was on the brink of a financial crisis. However, they also caution that the rate hikes may not be enough to bring inflation under control, given the depth of the economic crisis.

One of the biggest challenges facing Turkey is its hugely costly bank deposit support scheme, which compensates depositors for the lira's loss in value against hard currencies. The scheme is currently costing the government around $124 billion per year and is unsustainable in the long term.

Finance Minister Mehmet Şimşek has said that he wants to scale back the support measures, but he has warned that this could spook depositors and put renewed pressure on the lira.

Economists say that the only way to resolve the bank deposit support scheme issue is to allow the lira to depreciate further. However, this would be politically risky for Erdoğan, who has promised voters that he would keep the lira stable.

Another challenge facing Turkey is the war in Ukraine. The war has disrupted global supply chains and has pushed up the prices of energy and food, both of which Turkey imports heavily.

The war has also had a negative impact on Turkey's tourism industry, which is a major source of foreign revenue.

Overall, the outlook for the Turkish economy is uncertain. The recent rate hikes are a positive step, but they may not be enough to bring inflation under control. The government also needs to find a way to scale back the bank deposit support scheme without spooking depositors.

The war in Ukraine is another major risk factor. If the war continues to drag on, it could have a devastating impact on the Turkish economy.

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