Turkey’s central bank on Thursday hiked its key interest rate by another 250 basis points to 45%.
The hike to the benchmark one-week repo rate was in line with economists’ expectations.
It comes amid an ongoing battle against double-digit inflation for Turkey’s monetary policymakers, with the rate hike the latest step in that effort.
Inflation in Turkey increased to 64.8% year-on-year in December, up from 62% in November, and the country’s currency, the lira, hit a new record low against the U.S. dollar earlier in January, breaking 30 to the greenback for the first time.
Analysts predict this will be the last hike for some time, especially with local elections approaching in March.
There are a number of “levers” that a nation has to influence its economy. Here’s a really simplified version. The biggest lever on one side has low interest rates, and when you swing it to the other side is high interest rates.
When you want your economy to “heat up” or increase in activity, you swing the lever to “low interest rates” - Depositor’s (you, me, and corporations) money sitting safely in banks now earns a lot less interest. So a company is not making very much money just letting it sit. Companies will look for things they can remove their money from bank for and invest in (new businesses, hire new workers, expansion, research & development on new products). This ultimately means the money is spent to buys things. If everyone is doing this same thing, the price for things to buy goes up. There are more buyers than product. This is inflation, which too much, is bad for your economy. So what do you do when you now have high inflation and the value of your money is going down (because it takes more money to buy the same thing you bought before)?
When you want your economy to “cool down” or decrease activity, you swing the lever the other way to “high interest rates”. Companies see they can get great returns just by stuff their money in a bank and it is a super safe investment. Suddenly all of that spending that was happening in your economy to buy things for expansion, starting new business, or hiring additional workers dries up. The rise of prices slows, and given enough time, halts.
So who moves the lever? How do they know when to move it? Which side do they move it to? How long do they let it sit at that setting before they move it again? How do they know when to do that second move?
Federal bankers who are economists that watch for market trends and economic indicators. It is much more art than science. When they do their job well, you don’t even notice. Things just get good. When they don’t do well, your entire country feels it and daily life is massively affected. People lose jobs, houses, and have trouble feeding themselves.