Turkey hikes interest rate again to 45% after inflation nears 65%

Residents waiting at a bus stop under a large Turkish flag in Istanbul, Turkey, on Sunday, April 30, 2023.

Bloomberg | Bloomberg | Getty Images

Turkey’s central bank on Thursday hiked its key interest rate by another 250 basis points to 45%.

The hike to the benchmark one-week repo rate was in line with economists’ expectations.

It comes amid an ongoing battle against double-digit inflation for Turkey’s monetary policymakers, with the rate hike the latest step in that effort.

Inflation in Turkey increased to 64.8% year-on-year in December, up from 62% in November, and the country’s currency, the lira, hit a new record low against the U.S. dollar earlier in January, breaking 30 to the greenback for the first time.

Analysts predict this will be the last hike for some time, especially with local elections approaching in March.

“Encouragingly, the communications were relatively hawkish and suggest that policymakers recognise the need to keep interest rates high for a prolonged period if they are to have success in bringing inflation back down to single digits,” Liam Peach, senior emerging markets economist at London-based firm Capital Economics wrote in a note. “Our baseline view remains that the central bank will keep rates unchanged throughout this year.”

The Central Bank of the Republic of Turkey itself signaled that this was likely the end of the tightening cycle, saying of its decision: “The monetary tightness required to establish the disinflation course is achieved … The current level of the policy rate will be maintained until there is a significant decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range.”

The central bank’s move is the latest in a series of interest rate increases — now eight consecutive hikes since the May 2023 elections — that have been painful for Turks, as the country grapples with a dramatically weakened currency and skyrocketing living costs.

Turkish Central Bank Governor Hafize Gaye Erkan answers questions during a news conference for the Inflation Report 2023-III in Ankara, Turkey on July 27, 2023.

Anadolu Agency | Anadolu Agency | Getty Images

The last several years of high inflation are in large part the result of stubbornly loose monetary policy by the Ankara government. The lira is down 38% against the dollar year to date and has lost more than 80% of its value against the greenback over the last five years. 

A new finance team was appointed in June last year, and Turkey’s central bank embarked on a sharp pivot, pulling rates higher under the supervision of Turkish Central Bank governor Hafize Erkan. The country’s benchmark interest rate has since been lifted from 8.5% to 45%. 

Still, some observers still don’t believe it’s enough to effectively bring down inflation.

Capital Economics expects Turkey’s inflation to drop “towards 30-35% by year-end” from 65% now, while Bartosz Sawicki, a market analyst at Conotoxia Fintech, sees it hitting close to 75% in May before starting to fall.

“The cumulative tightening of 3650 basis points may not be enough to decisively tame Turkey’s long-standing inflation problem,” Sawicki said, which he described as being caused by “a vicious mix of loose monetary policy, deep negative real interest rates and persistent lira weakness.”

Broadly, analysts expect the central bank to hold rates for the rest of the year — and no rate cuts anytime soon.

“Inflation and inflation expectations will need to have fallen a long way before the central bank starts to cut interest rates,” Peach wrote.