Central Bank of Turkey hikes policy rate amid rising inflation concerns

By Ogulcan Ozgenc

Today, the Monetary Policy Committee of the Central Bank of the Republic of Turkey (CBRT) announced a 500 basis point increase in the policy rate from 25% to 30%. Market forecasts had ranged between 27.5% to 31%.

Reacting to this decision, economists voiced concerns, suggesting that the rate increase, though consistent with market projections, might still fall short in battling rising Inflation.

Economist Senol Babuscu commented that the Central Bank displayed a more explicit stance against Inflation with this decision. He reminisced about previous rate hikes, noting, "Had the Central Bank adjusted the policy rate more decisively in a shorter time frame, it would likely have been more effective against inflation." Babuşçu anticipates further increases, suggesting, "It could rise to at least 35% in the next meeting, or over two months. I foresee a minimum of 35% and a maximum of 40% in the coming two months. While 35% may not be adequate, a hike to 40% would be somewhat sufficient."

However, Babuscu also pointed out that, given the inflation rate, more is needed despite the recent favorable decision. He estimated a year-end inflation rate exceeding 75%, warning, "Inflation could climb to 90% by June 2024. We might not see any stringent anti-inflation policy till the elections are six months away. The policy's impacts would likely surface by July-August 2024, implying the inflation trend may persist for another nine months."

Another economist, Murat Birdal, acknowledged the rate hike met market expectations and deemed it an improvement over prior decisions. Yet, Birdal believes the rate needs to be more compelling to bolster demand for the Turkish Lira (TL), especially with year-end inflation predictions reaching 75%. He speculated about more measures to raise deposit interest rates and predicted continued hikes by the Central Bank. Birdal emphasized, "It remains to be seen whether this policy can sustain till the elections, considering its effects on sectors like housing and exports."

Recent surveys have indeed pointed to such an increase. A study by AA Finans, involving 19 economists, highlighted expectations of a 500 basis point hike, with year-end policy rate projections between 35% and 45%. Similarly, Reuters and Bloomberg HT surveys predicted a 500 basis point increase, aligning with the Central Bank's decision.