- Turkey hiked its primary interest rate from 30% to 35%, in accordance with the predictions of economists.
- In a “timely and gradual manner,” the central bank stated it would tighten monetary policy until the inflation outlook improves.
- Despite increasing inflation, the bank had implemented a contentious government-led strategy of low rates and loose policy up until June.
Turkish Central Bank Governor Hafez Ge Erkan answers questions during a press conference for the Inflation Report 2023-III in Ankara, Turkey on July 27, 2023.Thank you for reading this post, don't forget to subscribe!
Anadolu Agency | Anadolu Agency | getty images
To combat inflation, Turkey’s central bank raised its primary interest rate from 30% to 35% on Thursday.
This move aligned with the expectations of economists surveyed by Reuters.
Notably, prices exceeded projections in the third quarter, leading to the need for monetary tightening to manage inflation expectations and “control deterioration in pricing behavior.”
According to the bank, the effects of tax changes, wage hikes, and foreign exchange rates “have largely been realized.”
“Monetary tightening will be further intensified as necessary in a timely and gradual manner until a significant improvement in the inflation outlook is observed,” the bank stated in a release.
This interest rate decision comes after a 500 basis point increase in September, as the central bank shifts away from a prolonged period of unconventional monetary policy with persistently low rates despite rising inflation.
This change commenced in June when Turkish President Recep Tayyip Erdogan—known for pursuing a controversial policy stance—appointed former Wall Street banker Hafez Ge Erkan as the new central bank governor.
The primary interest rate has since been elevated to 8.5%, with economists arguing for further increases.
Türkiye’s economy has faced multiple challenges in recent years. The central bank predicts that inflation will surpass 60% by the end of 2023, while the Turkish lira has depreciated, resulting in higher import costs.
Liam Peach, senior emerging markets economist at Capital Economics, indicated that signs now point to a 500 basis point hike at the bank’s two remaining meetings this year. He stated that this should help real interest rates—adjusted for inflation—become positive before the end of next year.
“This will significantly contribute to maintaining investor optimism and keeping Turkey’s sovereign dollar bond spreads at multi-year lows,” Peach noted in a statement.
“The central bank’s policy tightening and recent communication efforts have helped rebuild its credibility and instill confidence that it is adopting a more serious approach to combating inflation.”