Turkey's central bank increases interest rate to 30% as country tries to tackle inflation

A fourth-straight increase intensifies a tightening cycle that began after President Erdogan’s re-election in May

The Tahtakale Bazaar in Istanbul. Analysts expect inflation at close to 70 per cent by the end of this year. EPA
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Turkey’s central bank delivered another significant interest rate hike on Thursday, a reflection of the urgency among officials to counter rampant inflation and win back the trust of markets.

The Monetary Policy Committee led by governor Hafize Gaye Erkan raised the benchmark rate to 30 per cent from 25 per cent, in line with the forecasts of most economists surveyed by Bloomberg.

The lira and Turkish bank stocks reversed gains after the announcement.

In a statement accompanying the decision, the MPC said it’s “determined to establish the disinflation course in 2024”, reiterating that “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”.

A fourth-straight increase intensifies a tightening cycle that began after President Recep Tayyip Erdogan’s re-election in May. It’s kicked into higher gear as his new team of technocrats tries to woo investors who’ve shunned Turkey after years of erratic and unconventional policies knocked the economy off balance.

The latest decision follows Mr Erdogan’s apparent endorsement of monetary tightening this month, despite his long-held beliefs that ultra-low rates could curb inflation. Finance Minister Mehmet Simsek told investors in New York that tackling inflation is Turkey’s “number one priority”.

The central bank can’t let up, with inflation now running at almost 60 per cent and set to accelerate further in the months ahead. Initially criticised for timid rate increases after Ms Erkan‘s appointment in June, policymakers have upped their pace starting with last month’s decision to hike by 750 basis points that exceeded most forecasts.

“As the strong course of domestic demand and the stickiness of services inflation persist, the increase in oil prices and the ongoing deterioration in inflation expectations pose additional upside risks to inflation,” the MPC said.

“Increasing domestic and foreign demand for Turkish lira-denominated assets” is among factors that “will contribute significantly to price stability”, it said.

“We expect the central bank to pause its rate hikes in the first quarter of 2024, ahead of local elections scheduled for March,” Bloomberg economist Selva Bahar Baziki said.

“Further rate increases are likely to follow the vote. This double wave tightening-cycle will likely mean even higher price gains in 2024 (we expect a peak of 70 per cent) and see the central bank then going higher for longer to anchor inflation expectations and tame price gains.”

Mr Erdogan’s new vision has been a tough sell abroad, however, because of his track record of prioritising economic growth and ousting three consecutive central bank governors for not being dovish enough.

The lira is still down almost 31 per cent against the dollar this year, one of the worst performers among its peers in emerging markets.

The inflation outlook has recently grown more dire, with monthly price growth leaping higher by over 9 percentage points in July and August. A survey conducted by the central bank found analysts expect inflation at close to 70 per cent at the end of this year, higher than the government’s estimate of 65 per cent.

Updated: September 21, 2023, 11:46 AM