In the past years Turkish Prime Minister Mr. Recep Tayyip Erdoğan is stubbornly refusing to raise Turkey's interest rate. This is movement resulted as Turkish lira losing its value and spiraling inflation. However Turkey keep economy floating for a long time despite the bad choices but Turkey Central Bank officialy announced they were essentially running out of money. Now, for avoid the baddest outcome Turkey goverment raise the interest rate but why now let's find out.
Turkey's economy grew dramatically in the early years of President Erdogan's leadership. But in recent years, he has ditched traditional economic wisdom by blaming high inflation on high borrowing costs and seeking to stimulate economic growth. In the past five years, the Turkish currency has lost more than 80% of its value and foreign investment has plummeted. Turks are now trying to move foreign cash out of local banks. Mehmet Kerem Coban of Kadir Has University said Turkey's economic model needed capital to survive because its reserves had melted away. Although the rate hike was intended to stabilise the Turkish lira, investors appeared unimpressed and it continued to slide against the dollar.
Turkey has hiked its main interest rate from 8.5% to 15%, reversing one of President Recep Tayyip Erdogan's unorthodox economic policies.
Turkey's leader has until now insisted on keeping interest rates down. Inflation is almost 40% and Turks are in the grip of a cost-of-living crisis. The head of Turkey's central bank, Hafize Gaye Erkan, 44, was only recruited from the US this month in the wake of Mr Erdogan's re-election as president.
Turkey need to raise the interest rate more for eligible to investment according tou Morgan stanley and Goldman Sachs.
Morgan Stanley had suggested it would go up to 20%
Goldman Sachs had suggested it would go up to 40%.
Why U-Turn Happened
The policy badly backfired. The annual inflation rate reached 85 percent late last year and the central bank burned through most of its reserves trying to prop up the lira -- down 90 percent against the dollar over 10 years -- from even bigger falls. Erdogan was forced into his first election runoff and then orchestrated one of his trademark policy reversals after extending his two-decade rule until 2028. He appointed respected economist Mehmet Simsek as finance minister and former Goldman Sachs director Erkan as the head of the nominally independent central bank.Turkish media said Simsek agreed to join the government only after winning assurances that he would be free to steady the ship as he saw fit.
Step towards the West?
Returning to the economic orthodoxy of increasing interest rates to rein in inflation is seen as opening the door to more foreign investment, and even moving closer to traditional Western allies.
"A return to orthodox economic policies will emphasise the importance of Western markets, Western lenders, financial institutions, etc," explained Serhat Guvenc, a professor of international relations at Istanbul's Kadir Has University.
"And this will probably have a bearing on the political aspect of foreign policy."
Conclusion
Mr Erdogan has been in power in Turkey for more than 20 years. He defeated his opposition rival last month in elections that international observers said suffered from an "unlevel playing field" that gave the incumbent president an unjustified advantage but economic crisis on the door and he need to overcome this issue for the future elections, looks like Turkey is returning to economic orthodoxy. It is a good sign but there is too many issue to handle before Turkish currency become stabil again.