Turkey increases interest rates to 50% amid mounting inflationary pressure

Turkey’s central bank delivered a surprise interest rate increase on Thursday, tightening the monetary policy further as the regulator fights to curb inflation that rose to 70 per cent in last year.

The Monetary Policy Committee, led by newly appointed governor Fatih Karahan, increased its benchmark rate to 50 per cent, from 45 per cent, the committee said.

"The committee has also decided to adjust the monetary policy operational framework by setting the central bank overnight borrowing and lending rates 300 basis points below and above the one-week repo auction rate, respectively," it said.

A rise in benchmark rate is a departure from the continuation of the transition to more investor-friendly, orthodox economic policies started by former governor Hafize Gaye Erkan.

In February, Ms Erkan abruptly resigned and President Recep Tayyip Erdogan promoted deputy governor Mr Karahan.

Mr Karahan, who took charge of the top regulatory job just two months ago, in his first public engagements, said getting inflation under control was his top priority and that the central bank was ready to act. However, he kept the rates steady at 45 per cent last month, pausing increases for first time in eight months.

He vowed to increase rates further if inflation surged.

Turkey is facing chronic inflation following years of Mr Erdogan's unorthodox policies. He installed a new economic team to stabilise the economy and control consumer prices last year. Turkey's central bank said in December that it expects inflation to rise to as high as 75 per cent in May, before dipping to about 36 per cent by the end of this year.

The Turkish lira is also the worst performer among emerging market currencies tracked by Bloomberg this month, with a loss of about 3.6 per cent against the dollar.

It’s down almost 9 per cent in the year to date. As local elections approach, the bigger worry is a repeat of its slump after last year’s presidential vote, when it dropped as much as 7 per cent in a single day, according to Bloomberg data.

"The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations. Consequently, disinflation will be established in the second half of 2024," the committee said.

Meanwhile, Fitch Ratings earlier this month upgraded Turkey’s credit rating on stronger fiscal policies and reduced financial risks.

Turkey’s ratings were upgraded one notch to B+ from B with a positive outlook, the rating agency said.

“The upgrade reflects increased confidence in the durability and effectiveness of policies implemented since the pivot in June 2023, including greater-than-expected front-loading of monetary policy tightening, in reducing macroeconomic and external vulnerabilities,” Fitch said at the time.

“Inflation expectations have eased and external liquidity risks have moderated, reflected by more favourable external financing conditions, higher reserves and a narrowing current account deficit.”