Turkey's Central Bank raises key interest rate to 35%

Turkey's Central Bank raises key interest rate to 35%
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Turkey's central bank increased its key interest rate 500 base points from 30% to 35% to combat stronger-than-expected inflation, citing the need to anchor inflation expectations and control pricing behavior.

Turkey's central bank announced a significant interest rate hike on Thursday, raising its key rate from 30% to 35%, in a continued effort to combat soaring inflation. The move was in line with expectations of economists polled by Reuters, who had anticipated the central bank's move to address the mounting inflation crisis.

The central bank cited the unexpected strength of price rises during the third quarter as a reason for the monetary tightening. In an official statement, the bank expressed the necessity to anchor inflation expectations and "control the deterioration in pricing behavior."

It was also noted that the knock-on effects from tax changes, wage growth, and exchange rate fluctuations have been "largely completed." The central bank further emphasized its commitment to strengthening monetary tightening as much as needed, in a timely and gradual manner, until a significant improvement in the inflation outlook is achieved.

This interest rate decision comes on the heels of a 500 basis point hike implemented in September. It marks the central bank's departure from a long period of unorthodox monetary policy in which rates were lowered even as inflation skyrocketed.

The shift in monetary policy began in June, following the appointment of Hafize Gaye Erkan, a former Wall Street banker, as the new central bank governor by Turkey's President Recep Tayyip Erdogan. Since then, the key interest rate has been hiked up from 8.5%, with many economists arguing that further increases are necessary to tackle the persistently high inflation.

Turkey's economy has faced numerous challenges in recent years, with inflation forecasted by the central bank to reach just over 60% by the end of 2023. The rapid depreciation of the Turkish lira has also exacerbated the economic turmoil, making imports more expensive and posing additional hurdles for the country's economic stability.