Turkey’s central bank surprised markets by raising interest rates to 50% on Thursday, citing a worsening inflation outlook and committing to further tightening if inflation continues to rise significantly and persistently.
The unexpected hawkish move, coming just 10 days before local elections, was viewed by analysts as a signal of the central bank’s independence from political influence and its determination to address rising prices.
The Turkish lira strengthened by up to 1.5% against the dollar, reaching 31.91, in response to the rate hike from the previous 45% rate. This reversal followed weeks of steady declines in the currency, and Turkey’s dollar bonds also saw an extended rally.
Since President Recep Tayyip Erdoğan’s re-election in May and subsequent shift towards a more orthodox economic policy, the central bank has increased its key one-week repo rate by 41.5 percentage points from 8.5% since last June.
The central bank stated that it would maintain a tight monetary stance until there is a significant and sustained decline in the underlying trend of monthly inflation, and inflation expectations align with the projected forecast range.
Piotr Matys, senior FX analyst at InTouch Capital Markets in London, remarked that the rate hike “stunned the market,” highlighting Governor Fatih Karahan’s determination to control high inflation.
While inflation is expected to decrease around mid-year, the recent depreciation of the lira and declining foreign reserves have raised expectations of more rate hikes ahead, possibly after the municipal elections on March 31, in which Erdoğan’s AK party aims to regain control of key cities like Istanbul.
Following the elections, tighter fiscal policy is anticipated, further increasing credit costs and adding to the economic challenges faced by Turks amid a prolonged cost-of-living crisis.
