Turkish Central Bank Surprises Markets with 50% Interest Rate Hike

In an unexpected move, Turkey’s central bank raised interest rates to 50% on Thursday, citing a worsening inflation outlook. The bank pledged further tightening measures if inflation continues to significantly and persistently worsen.

This hawkish decision, coming just 10 days before local elections, is interpreted by analysts as a demonstration of the central bank’s independence from political influence and its commitment to addressing inflationary pressures.

Following the hike from the previous 45% rate, the lira surged by up to 1.5% against the dollar, reversing weeks of steady decline. Additionally, Turkey’s dollar bonds experienced a rally.

Since last June, the central bank has increased its key one-week repo rate by 41.5 percentage points from 8.5%. This trajectory began after Recep Tayyip Erdoğan’s victory in the May presidential elections and his shift towards a more orthodox economic policy.

The central bank stated, “The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range.” Furthermore, it emphasized that policy would be tightened in anticipation of significant and persistent inflation deterioration.

Piotr Matys, senior FX analyst at InTouch Capital Markets in London, remarked that the rate hike “stunned the market,” indicating Governor Fatih Karahan’s determination to curb high inflation rates.

February saw inflation rise to a higher-than-expected 67%, even after the central bank held rates steady following a series of hikes since June. While a dip in inflation is anticipated around mid-year, concerns over the recent lira depreciation and declining foreign reserves suggest the possibility of further rate hikes, albeit likely after the municipal elections on March 31st.

Post-election, tighter fiscal policies are expected, exacerbating credit costs and compounding economic challenges for Turks amidst a prolonged cost-of-living crisis.