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CNN
CNN
24 Aug 2023
Reuters


NextImg:Turkey shocks with big rate hike to 25% to cool raging inflation
Turkey's suffering economy plays an important role in the country's elections

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    Turkey's suffering economy plays an important role in the country's elections

IstanbulTurkey's central bank hiked its key interest rate by a surprisingly large 7.5 percentage points to 25% Thursday, signaling a new determination to address rebounding inflation as part of a broader policy U-turn.

The move took the rate to its highest level since 2019, and sent the Turkish currency to its strongest level against the US dollar since mid-July.

The policy committee repeated that the bank would tighten "as much as needed in a timely and gradual manner" to cool inflation, which soared to nearly 48% last month.

Analysts said the move was the clearest step yet toward more mainstream economic policies after years of unorthodoxy under President Tayyip Erdogan, and should help rein in inflation expectations.

The lira had touched new all-time lows almost daily in recent weeks, including in the minutes before the policy decision. But it jumped more than 3% versus the dollar on the rake hike news, and was trading at 26.41 at 08.05 a.m. ET.

Economists had expected rates to rise to 20%, according to a Reuters poll, with some predicting an even more dovish move given the bank undershot expectations in the last two months.
The poll, conducted last week, showed that interest rates were not expected to rise to 25% until the end of the year.
The rate hike "sends a very strong signal that the [bank] is determined to rein in inflation and the initial market response is very positive," said Piotr Matys, senior FX analyst at In Touch Capital Markets.
However, he said, "at least some investors will be wondering whether [today's] hike has been approved by President Erdogan."
Erdogan appointed former Wall Street banker Hafize Gaye Erkan to head the central bank after his re-election in May, in the face of an economy strained by depleted foreign currency reserves and soaring inflation expectations.
He named three new policy makers — Osman Cevdet Akcay, Fatih Karahan and Hatice Karahan — to the bank in July. That was taken as another signal that independent economists may more forcefully tackle inflation, which has held well above the official 5% target for years.
    Erdogan's past drive to slash interest rates sparked a currency crisis in late 2021 and sent inflation above 85% last year.
    The currency is down about 68% in two years largely due to Erdogan's previously outspoken opposition to high rates and influence over the central bank.