The Turkish lira plunges to its lowest level on record after central bank hikes interest rates by 650 basis points in inflation fight
- The Turkish lira plunged to a record low against the US dollar on Thursday as the country seeks to tame inflation.
- Turkey's central bank hiked interest rates by 650 basis points to 15%, which was less than expected.
- The interest rate hike represents a big policy reversal following the re-election of Erdogan.
The Turkish lira plunged to a record low against the US dollar on Thursday after the central bank hiked interest rates less than markets expected.
The lira fell 4%, and it now takes 24.55 lira to buy a single US dollar. That followed a rate increase of 650 basis points to 15% in an ongoing bid to tame inflation.
"The strong course of domestic demand, cost pressures and the stickiness of services inflation have been the main drivers [of inflation]," Turkey's central bank said in a statement, adding that its tightening will help bring down inflation "as soon as possible."
The rate hike — Turkey's first in more than two years — represents a sharp policy reversal from last year, when President Recep Erdogan pressured the central bank to cut interest rates despite soaring inflation in a bid to prop up the country's economy.
After Erdogan's re-election last month, the central bank is taking a more traditional approach to taming inflation: by raising rates.
While the increase is a step in the right direction for Turkey, it likely won't move the needle enough in the central bank's bid to tame inflation. Economists had expected an interest rate spike to 20%, while Goldman Sachs predicted it would go to a sky-high 40%.
Inflation in Turkey hit a two-decade high of 85.5% in October, and has since dropped to about 40% in May.
But there's still plenty of room for inflation to fall in the country, and rate hikes are often viewed as the medicine needed to tame inflation, despite its often negative impact on the broader economy.
The central bank hinted that more tightening is likely "until a significant improvement in the inflation outlook is achieved."