the decision to raise rates comes after president recep tayyip erdogan replaced the head of the central bank istanbul—turkey’s central bank raised interest rates to 15 on thursday the first increase since 2021 and part of a policy correction by the country’s new economic leaders the bank raised the country’s benchmark interest rate the oneweek repo rate to 15 from 85 the low it reached under the previous central bank governor though the decision signals a new policy it is likely to disappoint some investors and economists who called on the bank to raise interest rates above the country’s inflation rate which currently stands at 39 the lira and government bonds dropped in value after the bank announced its decision which fell far short of predictions from major banks and analysts some of which predicted that turkey could double triple or even quadruple rates on thursday “this dovish decision leaves question marks in mind regarding the duration of the hiking cycle and fails to take inflation expectations under control” said selva demiralp a former economist at the federal reserve board and now a professor at istanbul’s koc university “the pressures on the turkish lira will continue” the decision comes after president recep tayyip erdogan replaced his finance minister and the head of the central bank after surviving a contentious reelection campaign in may in which a costofliving crisis narrowed support for him and his party before thursday’s decision erdogan pressured the bank into cutting interest rates despite the country’s high rate of inflation the opposite of what central banks throughout the world usually do the turkish president has said the policy would encourage economic growth and that lower rates would eventually calm inflation contrary to what economists have observed throughout history erdogan’s creditfueled growth push has created imbalances throughout the economy that he has attempted to mitigate with a complex web of regulations and financial programs it has also dangerously depleted the country’s supply of foreign currency and unraveled living standards for millions of turkish people thursday’s decision is the first by the country’s new central bank governor hafize gaye erkan the country’s first female centralbank governor is a princetontrained expert in financial risk management and a former executive at first republic bank and goldman sachs who was appointed by erdogan earlier in june seeking to reassure investors who have pulled their money out of turkey in recent years erdogan also reinstated finance minister mehmet simsek one of his longtime lieutenants who returned to the government earlier in june after a fiveyear hiatus thursday’s decision was preceded by weeks of anticipation and market uncertainty as both erkan and simsek offered few policy specifics after they were appointed including no specific statements about interest rates the ambiguity led some western banks and analysts to raise hopes for a more aggressive step to control inflation on thursday “it raises questions in the minds of market players it’s not enough to control inflation” said ugur gurses a turkish economist referring to the decision some investors and analysts see the decision as a part of a gradual return to orthodox economic policy by simsek and erkan in which they could continue to raise interest rates throughout the year turkey is in a precarious financial situation after an era in which erdogan has imposed his unusual economic vision on the country cutting interest rates while spending tens of billions to prop up the turkish lira which has lost 90 of its value in recent years that approach has led to rampant inflation raising the cost of food housing medicine and other essentials and pushing the country’s finances into a critical state the country is wrestling with a dire shortage of foreign currency most of turkey’s reserves are borrowed the turkish central bank uses currencyswap agreements through which domestic banks and foreign governments exchange dollars and other currencies for lira for a specific period excluding those swaps turkey’s reserves are a negative 60 billion the central bank scaled back its defense of the lira earlier in june before erkan’s appointment in a move welcomed by investors as a sign that the government was shifting toward a more sustainable policy the lira has since traded sideways fueling speculation that the central bank revived efforts to prop the currency up write to jared malsin at jaredmalsinwsjcom and chelsey dulaney at chelseydulaneywsjcom