Turkey’s central bank unexpectedly raised interest rates by 500 basis points to 50 percent on Thursday, mentioning a worsening inflation outlook and vowing to tighten further if a significant and sustained worsening of inflation is forecast.
The move came 10 days before local elections across the country and was seen by analysts as a signal that the central bank is independent of any political constraints and determined to tackle rising prices.
In response, the lira rallied as much as 1.5 percent to 31.91 against the dollar, reversing weeks of steady decline, and Turkish dollar bonds extended gains.
The bank has now raised its key one-week repo rate (TRINT=ECI), by 4,150 basis points from 8.5 percent since last June, following President Tayyip Erdogan’s May election victory and a shift toward greater orthodoxy in economic policy.
“The tight monetary position will be maintained until a significant and sustainable decline in the basic trend of monthly inflation is observed, and inflationary expectations do not approach the predicted range of the forecast,” it is stated.
To reinforce the tightening move, the central bank also adjusted its operating framework, setting overnight borrowing and lending rates 300 basis points below and above the repo rate.
The rate hike “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 took over from (Hafiza Gaye) Erkan when she unexpectedly resigned, is determined to bring staggeringly high inflation under control,” he said yesterday.
Inflation rose to a higher-than-expected 67 percent last month, when the central bank held rates steady after a continuous string of hikes since June.
While inflation is expected to fall around the middle of the year, the lira’s recent decline combined with a decline in foreign reserves has fueled some expectations of further interest rate hikes, albeit only after the March 31st municipal elections in which Erdogan’s AK Party is trying to win back the key to cities like Istanbul, writes Reuters.
E.Dz.
