Türkiye’s Central Bank Signals Potential End to Tightening Cycle Amid Latest Rate Hike

Türkiye’s central bank recently implemented its seventh consecutive rate hike during the final meeting of the year, raising the benchmark one-week repo rate from 40 percent to 42.5 percent to counter double-digit inflation. This move indicates a possible conclusion to the tightening cycle, which has been a notable aspect of recent policy shifts, according to experts.

Governor Hafize Gaye Erkan, leading the Monetary Policy Committee, explained the decision, stating that “as monetary tightness is significantly close to the level required to establish the disinflation course, the Committee reduced the pace of monetary tightening.” The bank anticipates completing the tightening cycle soon, with implications suggesting one more rate hike in January.

This tightening cycle, initiated in June, aimed to curb rising prices, resulting in a substantial increase in the policy rate from 8.5 to 42.5 percent. Experts, such as Senol Babuscu from Ankara’s Baskent University, anticipated the decision and foresee a final rate hike in January, marking the completion of the tightening cycle. Babuscu suggests that the policy rate is likely to remain stable for much of 2024.

Babuscu emphasizes that monetary policy alone, especially through interest rate hikes, may not be sufficient to reduce inflation. Structural reforms are deemed necessary to strengthen Türkiye’s economy, according to the economist.

Hakan Kara, a scholar at Ankara’s Bilkent University and former chief economist of the central bank, anticipates that the final rate hike in January will conclude the tightening cycle, focusing on cooling domestic demand and addressing stubborn inflation. Kara suggests that the policy rate will likely remain at this elevated level until at least the third quarter of 2024.

Historically, President Recep Tayyip Erdogan advocated for lower interest rates to combat inflation. However, following the May presidential election, a new economic team led by Treasury and Finance Minister Mehmet Simsek took a different approach, swiftly raising interest rates to counter inflation.

In November, consumer prices rose to 61.9 percent year-on-year, primarily driven by the depreciation of the Turkish lira. The central bank foresees inflation peaking at 70-75 percent in May, gradually decreasing to about 36 percent by the end of 2024. Some analysts, however, express skepticism about the optimism of this forecast, suggesting that achieving a 36 percent inflation rate by the end of 2024 might be challenging.

Economist Alaattin Aktas argues that households might have to wait until 2025 to experience relief from high inflation, considering potential challenges in achieving the projected inflation rates.

Despite an expansion of Türkiye’s economy by a more-than-expected 5.9 percent in the third quarter, driven by household spending, analysts anticipate economic activities slowing down following the monetary tightening.

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