Yesterday, on August 24, the Central Bank of the Republic of Turkey (CBRT) raised its key discount rate by 750 points from 17.5% to 25%. This is the third consecutive rate hike with new Central Bank Governor Hafize Gaye Erkan.

In June, Turkey raised its key interest rate for the first time in more than two years after Turkish President Recep Tayyip Erdogan appointed policymakers who promised to change the inflation picture. Turkey incrementally cut its discount rate from 19% at the end of 2021 to 8.5% last March as inflation surged, surpassing 80% at the end of 2022 and falling to just under 40% in June.

In response to these actions, the Turkish lira began finally strengthening against the dollar. A few months ago, many Fx analysts assumed that the country’s financial regulator would raise the rate to 40%. However, the Central Bank decided to do it slowly. Today, the Turkish lira is among the top of the most devalued currencies at the moment, along with such currencies as Lebanese pound, Zimbabwean dollar, Venezuelan Bolivar, Argentine peso and Pakistani rupee.

CBRT also began easing it’s so-called macroprudential policy – tools to ensure the stability of the financial system – introduced under the former central bank governor, Şahap Kavcıoğlu, and supported rate hikes with qualitative and selective credit tightening. Over the last weekend, it began canceling a costly scheme that protected lira deposits from currency depreciation.

Meanwhile, the central bank is forecasting Turkey’s annual inflation of 58% at the end of the year due to the depreciation of the lira as well as various tax increases recently introduced by Ankara. Turkey's president has previously said that the country's high inflation will come down.