Turkey’s central bank has increased its key interest rate from 30% to 35% as a measure to control inflation. This move was expected by economists and is aimed at anchoring inflation expectations and managing pricing behavior. The central bank stated that the effects of tax changes, wage growth, and exchange rates have mostly been resolved. It also emphasized its commitment to strengthening monetary tightening until there is a significant improvement in the inflation outlook.
This decision follows a 500 basis point hike in September, as Turkey’s central bank continues to shift away from unorthodox monetary policies that saw rates lowered despite skyrocketing inflation. The change in direction began in June when Hafize Gaye Erkan, a former Wall Street banker, was appointed as the new central bank governor by President Recep Tayyip Erdogan.
The key interest rate has been steadily increased from 8.5%, and economists argue that further hikes are necessary. Turkey’s economy has faced significant challenges in recent years, with inflation projected to exceed 60% by the end of 2023 and the depreciation of the Turkish lira leading to higher import costs.
Liam Peach, senior emerging markets economist at Capital Economics, believes that two more 500 basis point hikes are likely to occur at the remaining central bank meetings this year. He suggests that this would help achieve positive real interest rates, adjusted for inflation, before the end of next year. Peach believes that sustaining investor optimism and maintaining low sovereign dollar bond spreads will require a positive real interest rate for a few years to secure improvements in Turkey’s fundamentals and investor confidence.
Overall, the Turkish central bank’s decision to increase interest rates is a step towards mitigating inflation and stabilizing the economy. The continuation of these measures, along with sustained real interest rates, will be crucial for future economic progress and regaining investor trust.
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