The Tribune

By CHRIS ILLING

CCO @ ActivTrades Corp

The Bank of England, the UK central bank, is raising interest rates to 5 percent in the fight against inflation.

It is the 13th interest rate hike since the end of 2021. At the time, the interest rate was still just above zero. The key interest rate is currently at its highest level since the 2008 global financial crisis. This will now rise by a further 0.5 percentage points to 5 percent, as the Bank of England announced on Thursday last week after its meeting in London. This is a larger than expected increase.

The UK central bank has been trying to curb alarmingly-high inflation on the island for a good year and a-half. It has only enjoyed moderate success since the inflation rate has surprisingly remained at 8.7 percent, the highest level among the large western industrialised countries. The Bank of England's governor, Andrew Bailey, recently warned that bringing inflation under control is likely to take much longer than expected.

The UK is not the only country with higher-than-expected interest rate hikes. The Turkish central bank has almost doubled its key interest rates in the fight against inflation, which has been extremely high for months. In their first meeting since president Recep Tayyip Erdoğan was re-elected, central bankers decided to raise interest rates from 8.5 percent to 15 percent. The decision is a reversal of the country's monetary policy, which was previously focused on economic growth.

The Turkish central bank had lowered its key interest rate from 19 percent in 2021 to 8.5 percent, even though inflation had reached a 24-year high of 85.5 percent in October 2022. Western central banks, such as the US Federal Reserve and the European Central Bank (ECB), on the other hand, fight inflation with higher interest rates.

After his re-election a few weeks ago, Erdoğan signalled a turnaround in his controversial monetary and financial policies. He heralded the transition to a stricter interest rate policy with Simsek and the new head of the central bank, Erkan, who was trained in the US.

The current Turkish interest rate policy has triggered a currency crisis. The national currency, the lira, lost 44 percent of its value in 2021 and another 30 percent in 2022. This escalated the inflation problem because the country, which is poor in raw materials, purchases many goods from abroad and has to pay for them in foreign currency. The Turkish central bank is aiming for an inflation rate of 5 percent. The authorities have therefore tapped into the central bank's reserves to stabilise the currency. Still, the lira has already fallen about 20 percent this year.

Despite the turnaround in interest rates, the Turkish lira lost value and fell to a new record low. It fell to 24.41 liras against the US dollar after trading at 23.54 before the interest rate decision. May experts had expected a rate hike of up to 21 percent.

The European Central Bank raised its key interest rate by 0.25 percentage points the previous week. Only the US Federal Reserve left interest rates unchanged at its monetary policy meeting the same week. The US central bank thus took a break from tightening its monetary policy after ten hikes.