Turkey raises interest rates to 42.5pc

FE Team | Published: December 22, 2023 23:20:26

ISTANBUL, Dec 22 (Reuters): Turkey's central bank lifted its key interest rate by 250 basis points to 42.5 per cent on Thursday as expected, and said the aggressive tightening cycle will be done "as soon as possible" as it faces down years of soaring inflation.
The bank has lifted its one-week repo rate by 3,400 points since June, when Turkish President Tayyip Erdogan appointed former Wall Street banker Hafize Gaye Erkan as central bank governor to conduct a sharp pivot toward more orthodox policies.
It had raised rates by 500 basis points in each of the last three months but last month said tightening would soon end.
After halving the pace on Thursday, it said "monetary tightness is significantly close to the level required to establish the disinflation course."
The bank expects to "complete the tightening cycle as soon as possible," it said, adding, "tightness will be maintained as long as needed to ensure sustained price stability."
Turkish lira was largely stable after the seventh straight monthly rate hike, which brings the policy level to its highest in two decades. It also edges real rates into positive territory, based on end-2024 inflation expectations.
All 12 respondents in a Reuters poll had expected the central bank to hike rates to 42.5 per cent. They forecast a bit more policy tightening early next year before easing in the second half.
The central bank expects inflation to rise from near 62 per cent last month to 70-75 per cent in May, before dipping to about 36 per cent by the end of next year as tightening cools prices.
Selva Demiralp, professor at Istanbul's Koc University and a former Federal Reserve economist, said the policy level might be enough to rein in inflation if the bank avoids premature easing and capital continues to flow into Turkey next year.
"While we can estimate the central bank's reaction function... we cannot tell how much the central bank will be able to follow that route," she said.
"This is because we cannot estimate President Erdogan's reaction function to monetary policy."
Erdogan's past insistence on cutting rates despite rising prices sparked several currency crashes and sent inflation to two-decade highs. Though he backs the current policy, he has fired four central bank chiefs in as many years, raising questions over whether Erkan can stay the course.
In a sign of confidence that she can, Turkey's five-year credit default swaps, which measure default risk, dipped below 300 basis points this week from near 700 in May. JPMorgan told Reuters that Turkey could issue record debt in 2024.