Turkish central bank raises interest rate 42.5% to combat high inflation

Turkey’s central bank has hiked its key interest rate by 2.5 percentage points as part of its efforts to combat high inflation that has left many households struggling to afford essential items

Turkey Economy (Copyright 2023 The Associated Press. All rights reserved)

Turkey’s central bank hiked its key interest rate by 2.5 percentage points on Thursday as part of its efforts to combat high inflation that has left many households struggling to afford rent and essential items.

The bank's Monetary Policy Committee raised its benchmark rate to 42.5%, delivering its seventh interest rate hike in a row to tame inflation, which rose to 61.98% last month.

But the bank signaled that the rate hikes — which took borrowing costs from 8.5% to the current 42.5% — could soon end.

“The committee anticipates to complete the tightening cycle as soon as possible,” it said. “The monetary tightness will be maintained as long as needed to ensure sustained price stability.”

The series of rate hikes came after President Recep Tayyip Erdogan — a longtime proponent of an unorthodox policy of cutting rates to fight inflation — reversed course and appointed a new economic team following his reelection in May.

The team includes former Merrill Lynch banker Mehmet Simsek, who returned as finance minister, a post he held until 2018, and Hafize Gaye Erkan, a former U.S.-based bank executive, who took over as central bank governor in June.

Prior to that, Erdogan had fired central bank governors who resisted his rate-slashing policies, which economists said ran counter to traditional economic thinking, sent prices soaring and triggered a currency crisis.

In contrast, central banks around the world raised interest rates rapidly to target spikes in consumer prices tied to the rebound from the COVID-19 pandemic and then Russia’s war in Ukraine.

“There is much still to be done in taming inflation but the bond market is optimistic that Turkey is on the right track,” said Cagri Kutman, Turkish market specialist at KNG Securities. "Turkish bonds have been amongst the strongest performing out of major economies over the past month.”

Bartosz Sawicki, market analyst at Conotoxia fintech, said that the central bank was likely to complete its rate hikes next month at 45%.

“Consequently, the (central bank) is set to halt the tightening before the local elections in March,” he wrote in an email.