Turkey’s Central Bank raises policy rate to 30% amid inflation surge

Turkey's central bank on Thursday, announced a significant 500 basis points increase in interest rates, a step that matches the anticipation of financial experts and markets.

The Monetary Policy Committee (MPC), under the leadership of Governor Hafize Gaye Erkan, decided to escalate the benchmark rate from 25% to 30%. However, the lira and Turkish bank stocks saw a slump following the announcement.

In an official statement discussing the reasoning behind this move, the MPC outlined its dedication to set a "disinflation course in 2024." The committee also emphasized that they would further enhance "monetary tightening as much as needed in a timely and gradual manner" until a prominent improvement in the inflation outlook emerges.

This marks the fourth consecutive rate hike, amplifying the tightening spree initiated after the reelection of President Recep Tayyip Erdogan in May. The pace intensified, especially with Erdogan's latest team of technocrats making efforts to attract investors. This became imperative after previous inconsistent and unconventional economic strategies led to market unease.

The recently announced policy aligns with Erdogan's apparent nod to monetary tightening earlier this month. This comes as a surprise, considering his longstanding view that meager rates might be the answer to controlling inflation. Reinforcing this stance, Finance Minister Mehmet Simsek informed investors in New York that addressing inflation is atop Turkey's priority list.

Facing an inflation rate nearing 60%—with indicators pointing to a further increase—the central bank is under immense pressure. Policymakers were initially under the scanner for their hesitant approach to rate augmentation post Erkan's induction in June. But they changed gears last month with a 750 basis-point increase, which surpassed most predictions.

The MPC highlighted concerns stating, "The strong trajectory of domestic demand combined with the rigidity of services inflation, coupled with escalating oil prices and deteriorating inflation expectations, present further risks to inflation." They further noted that the rising local and international demand for assets in Turkish lira would "contribute significantly to price stability."