Turkey's central bank delivers another big rate increase to rein in inflation

Country lifted its benchmark rate to 35 per cent from 30 per cent

Inflation in Turkey remains high, reducing the appeal of the lira for foreign investors. EPA

Turkey’s central bank delivered another hefty interest-rate increase on Thursday and signalled it could tighten policy further to rein in inflation that’s on track to end this year near 70 per cent.

The Monetary Policy Committee, led by Governor Hafize Gaye Erkan, raised its benchmark rate to 35 per cent from 30 per cent, in line with most forecasts. Turkish bank stocks rose as much as 3 per cent after the decision before paring gains as of 3.52pm local time. The lira was little changed.

It’s “yet another large hike” that confirms the monetary authority is “fully committed to bringing inflation under control and to re-anchor inflation expectations”, said Piotr Matys, an analyst in London with InTouch Capital Markets. Yet inflation is “staggeringly high” and that’s reducing the appeal of the lira for foreign investors, he said.

In a statement, the MPC repeated word-for-word its guidance from last month, saying “monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in inflation outlook is achieved”.

The MPC added that its monetary transmission mechanism would be strengthened through “additional steps to increase the share of Turkish lira deposits”.

That is part of a push among officials to stop Turks moving into dollar deposits and putting pressure on the lira, which is down 34 per cent this year against the US currency. The latest banking data shows that 59 per cent of deposits are held in liras.

Thursday’s increase is the central bank’s fifth in a row as it looks to get a grip on inflation that is at 62 per cent, one of the highest levels in the world. More rate increases are needed to attract foreign inflows into local bond markets, especially with the central bank expecting price growth to continue quickening until the second quarter of next year.

Since President Recep Tayyip Erdogan’s re-election in May, Turkey has sought to unwind what finance minister Mehmet Simsek described as “policy distortions”. Those have been blamed for scaring away foreign investors and causing a series of currency crises in recent years.

Still, Thursday’s rate increase may be the last one before Turkey holds local elections in March, according to Bloomberg Economics. Mr Erdogan, who has long championed the economic benefits of low interest rates, is trying to win back opposition-held cities such as Istanbul and Ankara and will be reluctant to keep tightening policy as the ballot nears.

While the key rate has risen from just 8.5 per cent since Ms Erkan took over in June, official borrowing costs are well below zero when adjusted for inflation.