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Turkey Lifts Rates After Erdogan's Endorsement of Austerity

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President Recep Tayyip Erdogan’s change of direction on the economy earlier this month has pushed the Turkish lira sharply higher.

President Recep Tayyip Erdogan’s change of direction on the economy earlier this month has pushed the Turkish lira sharply higher.

Photo: Nicole Tung/Bloomberg News

ISTANBUL—Turkey’s central bank sharply raised its benchmark interest rate, pledging to combat inflation less than two weeks after President Recep Tayyip Erdoganreshuffled his economic team and backed a shift in approach to repair an economy beset by a dwindling currency.

Led by newly appointed governor Naci Agbal, the central bank Thursday raised its key, one-week repo rate to 15% from 10.25%, saying it would provide all funding through that facility.

The rate increase came on the heels of a surprise shake-up earlier this month. Mr. Erdogan dismissed Mr. Agbal’s predecessor, accepted the resignation of his finance minister and son-in-law, Berat Albayrak, and signaled that he would accept what he had long rejected: austerity.

“We will not abstain from making sacrifices and implementing the correct recipes, even if they are bitter,” the president said on Nov. 11.

Mr. Erdogan’s about-face and the ensuing rate increase has pushed the lira sharply higher. The Turkish currency, which had lost nearly a third of its value against the U.S. dollar this year, has risen about 12% since the economic leadership reshuffle.

The new approach contrasts with the low-rate policy Mr. Erdogan instructed the central bank to pursue for much of the past 18 months. By keeping its benchmark interest rate routinely below consumer inflation, the central bank discouraged both foreign investors and Turkish people from holding lira and lira-denominated assets, precipitating the currency to a series of all-time lows this fall.

The lira’s decline was so abrupt that economists were predicting Turkey would run into a full-scale balance-of-payments crisis unless Mr. Erdogan’s administration changed course.

The central bank’s policy makers said Thursday they had decided to “implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process.”

Write to David Gauthier-Villars at David.Gauthier-Villars@wsj.com

A Global Asset Management Seoul Korea Magazine

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