©Reuters. A logo of the Central Bank of Turkey is pictured at the entrance to its headquarters in Ankara, Turkey, February 8, 2024. REUTERS/Cagla Gurdogan/File Photo
By Ezgi Erkoyun and Daren Butler
ISTANBUL (Reuters) – Turkey’s central bank unexpectedly raised interest rates by 500 basis points to 50% on Thursday, citing a worsening inflation outlook and vowing to tighten further if it expects the price situation to worsen significantly. significant.
The aggressive surprise came 10 days before nationwide local elections and was seen by analysts as a sign that the central bank was independent of any political constraints and determined to tackle inflation that is rising towards 70%.
In response, the lira rallied as much as 2% and settled around 31.9 against the dollar, reversing weeks of continuous declines, and Turkey’s dollar bonds extended the rally.
The rate hike — which beat virtually all predictions — “stunned the market,” said Piotr Matys, senior FX analyst at In Touch Capital Markets in London.
“Today’s decision is a very strong signal that Governor (Fatih) Karahan, who succeeded (Hafize Gaye) Erkan when he unexpectedly resigned, is determined to bring incredibly high inflation under control,” he said.
The bank has now raised its key one-week repo rate to 4,150 basis points from 8.5% since last June, following President Tayyip Erdogan’s victory in May’s election and a U-turn towards greater orthodoxy in economic policy.
Tight monetary policy will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed and inflation expectations converge towards the expected range.
Policy “will be made more restrictive if a significant and persistent worsening of inflation is expected,” he added after the monthly meeting of the monetary policy committee.
To reinforce the tightening move, the central bank also adjusted its operating framework, setting overnight lending and borrowing rates 300 basis points below and above the repo rate.
PRE-ELECTION FEE INCREASE
Inflation rose to a higher-than-expected 67% last month as the central bank kept rates stable after a series of hikes since June.
Although inflation is expected to decline around the middle of the year, expectations remain stubbornly high. The lira’s recent decline, coupled with falling foreign reserves, had fueled some expectations of further rate hikes in the future, though not before the March 31 municipal vote for which Erdogan’s AK Party is seeking to recapture key cities such as Istanbul.
In a Reuters poll, 20 out of 22 respondents expected the bank to keep the rate stable in March, while the other two expected an increase of just 250 basis points. However, the poll showed that a strong majority expects a new increase by the end of the year.
The central bank has taken other steps to tighten credit in recent weeks, including actions on reserve requirements, prompting some banks to reduce lending limits or even stop offering loans. It also increased the maximum rate on credit card cash withdrawals.
After the next elections, a more restrictive fiscal policy is expected, which will add to the increase in credit costs and aggravate the economic suffering of Turks after a years-long cost of living crisis.
Earlier this month, Finance Minister Mehmet Simsek promised measures to help the central bank reduce inflation. Fiscal stimulus cooled considerably after the general election in May last year, but has picked up slightly in recent months ahead of this month’s vote.
“You can read into this (rate increase) that Simsek and the central bank have the ability to be more aggressive, upcoming election or not,” said Peter Kisler, emerging markets portfolio manager at Trium Capital in London.
Last Friday, the central bank’s monthly survey of market participants’ expectations showed Turkey’s year-end year-end inflation at 44.19%, higher than the bank’s own forecast of 36%.