Turkey CB raises rates to 42.5%

Turkey’s central bank lifted its key interest rate by 250 basis points to 42.5 per cent on Thursday as expected as it faces down years of soaring inflation, but promised to end the aggressive tightening cycle as soon as possible.

Some analysts said one more rate hike was on the cards after seven straight months of tightening.

The central bank has lifted its one-week repo rate by 3,400 basis points since June, when President Tayyip Erdogan appointed former Wall Street banker Hafize Gaye Erkan as its governor to conduct a sharp pivot toward more orthodox policies.

It had raised rates by 500 basis points in each of the last three months but last month said tightening would soon end.

After halving the pace on Thursday, it suggested it was even closer to the finish line by saying it expects to “complete the tightening cycle as soon as possible”.

Monetary “tightness will be maintained as long as needed to ensure sustained price stability,” it added, repeating that policy was “significantly close to the level required to establish the disinflation course.”

Turkish lira was largely stable after the move, which brings the policy rate to its highest in two decades. The hike also edges real rates into positive territory, based on end-2024 inflation expectations.

All 12 respondents in a Reuters poll had expected the move to 42.5 per cent. They forecast a bit more policy tightening early next year before easing in the second half.

The central bank expects inflation to rise from near 62 per cent last month to 70-75 per cent in May, before dipping to about 36 per cent by the end of next year as tightening cools prices.

Selva Demiralp, professor at Istanbul’s Koc University and a former Federal Reserve economist, said the policy level might be enough to rein in inflation if the bank avoids premature easing and capital continues to flow into Turkey next year.