Turkey Raises Interest Rates to 45% as Inflation Nears 65%

Turkey’s central bank increased its key interest rate by 250 basis points to 45% on Thursday, aligning with economists’ expectations. This move is part of ongoing efforts to combat double-digit inflation, with the rate hike representing the latest measure in this initiative.

In December, Turkey experienced a year-on-year inflation increase to 64.8%, up from 62% in November. The Turkish lira reached a historic low against the U.S. dollar in January, breaking 30 lira to the greenback for the first time.

Economists anticipate that this rate hike will likely be the last for some time, especially with local elections approaching in March. The central bank signaled that it may mark the end of the tightening cycle, emphasizing the need to maintain high-interest rates for an extended period to achieve success in reducing inflation.

Liam Peach, senior emerging markets economist at Capital Economics, noted that the communications from the central bank were relatively hawkish, indicating an acknowledgment of the necessity of keeping interest rates elevated to tackle inflation effectively.

The Central Bank of the Republic of Turkey stated, “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.”

This rate hike is part of a series of consecutive increases, totaling eight since the May 2023 elections, causing economic challenges for the Turkish population amid a weakened currency and rising living costs.

Despite the tightening measures, some observers remain skeptical about the effectiveness of these actions in curbing inflation. Capital Economics anticipates a drop in Turkey’s inflation towards “30-35% by year-end” from the current 65%, while another analyst expects it to approach 75% in May before a gradual decline.

The cumulative increase in interest rates, from 8.5% to 45%, might not be sufficient to decisively address Turkey’s longstanding inflation issue, attributed to a combination of loose monetary policy, negative real interest rates, and persistent lira weakness.

Analysts generally foresee the central bank maintaining interest rates throughout the year, with no imminent rate cuts expected. The reduction in inflation and inflation expectations will likely be crucial factors before any consideration of interest rate cuts by the central bank.

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