Turkey’s Stance on Policy Rate

Abstract

This study explains Turkey’s stance on policy rates throughout the 2010s and the reasons behind its recent monetary policy adjustments. Policy rate is a crucial tool for central banks which manages the economy, influences inflation, economic growth and employment. It is measured by basis points which is is the terminology to denote changes in interest rates. Turkey maintained an expansionary monetary policy throughout the 2010s to promote economic growth, and combat unemployment, maintaining relatively low interest rates. However, Turkey then shifted to a contractionary monetary policy in 2023 after the increasing inflation, currency devaluation and economic imbalances. This study also explains how the recent leadership changes in the Central Bank of Turkey have marked a new phase in the country’s monetary policy direction. In 2023, Hafize Gaye Erkan became the first female governor of the Central Bank, initiating a shift from an expansionary stance to an aggressive increase in policy rates. During her time in office, policy rates were raised significantly to address high inflation and currency instability, marking a clear change from earlier approaches. The behavior was then maintained by her successor, Fatih Karahan, by raising the policy rate by 50.0\% in March 2024. The paper highlights the significant effects of policy rate changes on Turkey's economy. It discusses their role in managing inflation, which hit record highs in 2023, and their impact on economic stability, investor trust, and financial markets. This paper also examines how external factors, like U.S. Federal Reserve decisions, affect Turkey’s monetary policy, especially regarding capital flows and exchange rates.