The Central Bank of the Republic of Türkiye (CBRT) Thursday lifted its key policy rate, also known as the one-week repo rate, by 500 basis points, meeting the overall market forecast and affirming its monetary tightening cycle drive following the U-turn in economic policies after the May elections.
Accordingly, the bank raised its policy rate by another 500 points to 30% following the increase of 1,650 basis points till August.
The committee decided to continue the monetary tightening process to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior, the bank said in a statement released after its Monetary Policy Committee (MPC) meeting.
“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.”
“Inflation will remain close to the upper limit of the forecast range,” it warned.
The central bank earlier said inflation would likely rise to near 62% by year-end, higher than the upper band of its forecast. The bank hiked its year-end inflation forecast upwards for 2023, 2024, and 2025 in its third quarterly inflation report released in July.
The annual inflation rate rose just below 59% in August after regressing to as low as 38.21% in June.
The consumer price index (CPI) peaked at a 24-year high of 85.5% eleven months ago, according to official data of the Turkish Statistical Institute (TurkStat).
“As the strong course of domestic demand and the stickiness of services inflation persist, the increase in oil prices and the ongoing deterioration in inflation expectations pose additional upside risks to inflation,” the bank noted.
The key rate before MPC was seen rising to 30%, according to the median response of 16 institutions in a Reuters poll, with forecasts ranging from 27.5% to 31%.
Most analysts surveyed by Bloomberg also saw the CBRT raising the benchmark policy rate to 30%.
Economists polled by Anadolu Agency (AA) survey last week said they expected a 500-basis-point interest rate hike, with the lowest estimate at 250 basis points and the highest at 600.
President Recep Tayyip Erdoğan is known as a proponent of lower borrowing costs but said that inflation would fall to single digits with the support of tight monetary policy, marking his strongest pledge of support for his new economic team’s policy overhaul.
Speaking at the event in New York on Wednesday regarding the nation’s recently unveiled medium-term program, Erdoğan said Türkiye aims to “eliminate the factors that increase inflation by applying the tools of fiscal and income policies without compromising economic growth.”
After winning reelection in May, Erdoğan named a new Cabinet, including two accomplished bankers, who have launched aggressive interest rate hikes to tackle the country’s long-term inflation issue.
Following the U-turn, the policy rate has been moved up by a combined 1,650 basis points in three months till August and CBRT Governor Hafize Gaye Erkan has promised more tightening, given her central bank expects inflation to rise until about May next year.
Last month, CBRT surprised with a 750-point hike that lifted the key one-week repo rate to 25% from 17.5%.
To increase the functionality of market mechanisms and strengthen macro-financial stability, the committee continues to simplify and improve the existing micro- and macroprudential framework, the bank said in its Thursday report.
Guided by impact analyses, the simplification process will continue to be gradual, the bank reiterated.
Fitch Ratings earlier this month improved Türkiye’s outlook from “negative” to “stable,” citing a return to more conventional economic policymaking since the May election as the primary driver behind its decision.
