Long opposed to rate increases, Erdogan now backs plan that includes raising rates, minister says

A top government official says Turkish President Recep Tayyip Erdogan supports his new economic team's plan to increase interest rates to lower the country's soaring inflation

Turkish President Recep Tayyip Erdogan, long a proponent of cutting interest rates, now supports his advisers’ economic plan that includes raising rates, a member of his economic team said Thursday.

In a theory that runs contrary to traditional economic thinking, Erdogan has long pressured Turkey's central bank governors to lower rates. The move was blamed for inflaming a cost-of-living crisis in the country.

After winning reelection in May, however, Erdogan appointed a new economic team, including two accomplished bankers, signaling a turn to more conventional policies. But questions have lingered over whether the team would retain Erdogan’s backing or whether the Turkish leader would reinstate unorthodox policies.

"Whether it’s disinflation or the fiscal program, the president’s support is complete,” said Mehmet Simsek, a former Merrill Lynch banker whom Erdogan re-appointed as finance minister, told a group of journalists. “There isn't the slightest hesitation."

The new team also includes Hafize Gaye Erkan, who took over as central bank governor. The first woman to hold that position, Erkan was previously co-chief executive of the now-failed San Francisco-based First Republic Bank.

In recent years, Erdogan fired three central bank governors for failing to fall in line with his rate-cutting policies.

Many have argued that Erdogan may be reluctant to embark to a tightening policy ahead of local elections in March 2024, when the government traditionally engages in a spending spree.

"We will continue with the tightening process with all our means until we reach a significant improvement in inflation," Erkan said. “Disinflation is our first priority, there is no compromise on this.”

Since taking office in June, Erkan has raised interest rates from 8.5% to 25%.

Inflation is running at nearly 60%, according to official figures, although independent economists say the real rate is much higher.

Simsek, Erkan and other ministers spoke a day after the government unveiled its midterm economic plan, which aims to lower inflation to single digits within three years.

The government estimates that inflation will reach 65% at the end of the year before starting to ease, according to the plan.