Cityscape at sunset on March 4, 2024 in Istanbul, Turkey.
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Turkey’s central bank surprised markets on Thursday when it raised its key interest rate, the one-week repurchase rate, from 42.5% to 46%, ending the easing cycle it began in December of last year.
The decision comes on the back of economic disruption due to U.S. tariffs and major political unheaval and investor flight following the arrest of Istanbul mayor and opposition leader Ekrem Imamoglu in March.
“The decisiveness regarding tight monetary stance is strengthening the disinflation process through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations,” Turkey’s Monetary Policy Committee wrote in the statement accompanying its decision.
The committee cited “potential effects of the rising protectionism in global trade on the disinflation process through global economic activity, commodity prices and capital flows,” and said “the tight monetary stance will be maintained until price stability is achieved via a sustained decline in inflation.”
Annual inflation in Turkey came in at 38.1% in March.
The rate hike comes in the face of significant foreign currency depletion, as the Turkish central bank spent as much as $25 billion in three days following the arrest of Imamoglu and ensuing protests on March 19 to defend the lira, which briefly ropped to a record low of more 40 to the U.S. dollar. Turkish markets initially plunged on news of the arrest, and the country’s government on March 23 banned short selling and relaxed buyback rules in an effort to bolster stocks.
On March 20, the lira drop had prompted the central bank to make a 200-basis-point emergency hike that brought its overnight lending rate to 46.00%, the top of its interest rate corridor.
The Thursday interest rate lift is therefore as a largely technical adjustment following the March developments, according to Brad Bechtel, global head of FX at Jefferies.
“We’ll see what (Turkish President Recep) Erdogan has to say about the central bank’s moves but so far the central bank has done a rather good job navigating the political noise in its continued fight against inflation,” Bechtel wrote in a note following the bank’s Thursday announcement.
The central bank’s move “would formalise the tightening delivered last month and suggests that policymakers have become more concerned about upside risks to inflation,” Nicholas Farr, emerging Europe economist at Capital Economics, wrote in analysis on Thursday.
The monetary committee’s statement “highlighted the risks from a weaker lira, and that policymakers would closely monitor capital flows amid the current uncertainty around US trade protectionism,” Farr wrote.
Capital Economics’ analysts assess inflation in Turkey is on a downward trajectory in the coming months, and do not see further tightening in store.
“But it’s clear,” the note added, “that the central bank’s easing cycle has hit a major roadblock, and it could take some time before the easing cycle is restarted. We now forecast the one-week repo rate to end the year at 40.00% (previously 35.00%).”
