Inflation Nears 65% In Turkey, Prompting Another Hike In Interest Rates To 45%

(CTN News) – The Turkish central bank announced Thursday an increase of 250 basis points to 45% in inflation.

Economists had expected a rise in the one-week repo rate.

This rate hike is the latest step in Turkey’s ongoing effort to combat double-digit inflation.

Turkey’s inflation rate increased to 64.8% year-on-year in December, up from 62% in November, and its currency, the lira, hit a new record low against the dollar earlier in January, breaking 30.

According to analysts, this is likely to be the last hike for some time, especially since local elections are just around the corner.

According to Liam Peach, senior emerging markets economist at Capital Economics, the communications were relatively hawkish and indicate that policymakers recognize the need to keep interest rates high for a long period if they are to bring inflation down to single digits. It remains our baseline expectation that the central bank will keep interest rates unchanged this year.”

According to the Central Bank of the Republic of Turkey, this decision signals the end of the tightening cycle: “The monetary tightness needed for disinflation is achieved…” The current level of the policy rate will be maintained until the underlying trend of monthly significantly declines and inflation expectations converge to the projected forecast range.

As the country grapples with a dramatically weakened currency and skyrocketing living costs, the central bank’s move is the latest in an eight-consecutive hike of interest rates since May 2023.

A stubbornly loose monetary policy by the Ankara government has contributed to high over the past several years. Over the past five years, the lira has lost more than 80% of its value against the dollar, down 38% against the dollar year to date.

Under the supervision of Turkish Central Bank governor Hafize Erkan, Turkey’s central bank embarked on a sharp pivot under the leadership of a new finance team. There has been an increase in the country’s benchmark interest rate from 8.5% to 45% since then.

Inflation still persists, according to some observers.

Inflation in Turkey is expected to drop to 30-35% by year’s end, down from 65% now, according to Capital Economics, while Bartosz Sawicki, a market analyst at Conotoxia Fintech, sees it reaching almost 75% in May.

The cumulative tightening of 3650 basis points may not be enough to decisively tame Turkey’s long-standing inflation problem, according to Sawicki, which has been caused by a vicious mix of loose monetary policy, deep negative real interest rates, and persistent lira weakness.
Analysts predict the central bank will hold rates for the remainder of the year – no rate cuts are expected.

The central bank must have cut rates before inflation and inflation expectations fell, Peach wrote.

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