Turkey's central bank raises key rate to 25% to counter rising prices

The regulator has said it will continue to tighten monetary policy until it brings down inflation, which currently stands at 47.83 per cent

A street vendor passes a book store in Istanbul, Turkey. Recent indicators point to a continued increase in the underlying trend of inflation, the central bank said. Bloomberg

Turkey's central bank raised its key policy rate by 750 basis points to 25 per cent on Thursday as it continues to tighten policy in an effort to reduce inflation.

The monetary policy committee raised the one-week repo auction rate from 17.5 per cent, the central bank said in a statement.

Most economists polled by Bloomberg and Reuters expected the rate to increase to 20 per cent.

Following the move the lira gained more than 2 per cent against the US dollar.

“The committee has decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, anchor inflation expectations and control the deterioration in pricing behaviour,” the central bank said.

Annual inflation in the country currently stands at 47.83 per cent.

Recent indicators point to a continued increase in the underlying trend of inflation, the regulator said.

“The strong course of domestic demand, cost pressures stemming from wages and exchange rates, stickiness of service inflation and tax regulations have been the main drivers,” it said.

Given its monetary tightening stance, the committee anticipates that “disinflation will be established in 2024”, it added.

At an event last month, Turkey’s new central bank governor pledged to stick with a “gradual” cycle of monetary tightening despite more than doubling the forecast for price gains.

Hafize Gaye Erkan, appointed to the role in June, said the central bank projects inflation will end this year at 58 per cent, up from her predecessor’s forecast of 22.3 per cent.

Going forward, the policy rate will be “determined in a way that will create monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and to reach the 5 per cent inflation target in the medium term”, the central bank said.

Monetary tightening will be “further strengthened as much as needed” in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.

Along with the increase in the policy rate, the committee will continue to make decisions on quantitative tightening and selective credit tightening to support the monetary policy stance, it said.

“Foreign direct investment, improvement in external financing conditions, continued increase in foreign exchange reserves, and the positive impact of tourism revenue on the current account balance will contribute significantly to price stability,” the regulator said.

Recent regulations targeting a rising share of Turkish lira deposits will strengthen the monetary transmission mechanism, it added.