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Turkey’s central bank hikes key interest rate to 35%

Turkish Central Bank Governor Hafize Gaye Erkan answers questions during a news conference for the Inflation Report 2023-III in Ankara, Turkey on July 27, 2023.

Anadolu Agency | Anadolu Agency | Getty Images

Turkey’s central bank on Thursday hiked its key interest rate from 30% to 35%, in an ongoing bid to rein in inflation.

The move was in line with expectations of economists polled by Reuters.

The central bank said price rises were stronger than expected in the third quarter and monetary tightening is needed to anchor inflation expectations and “control the deterioration in pricing behavior.”

It said knock-on effects from tax changes, wage growth and exchange rates have been “largely completed.”

“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in inflation outlook is achieved,” the bank said in a statement.

The interest rate decision follows a 500 basis point hike in September, as the central bank continues to pivot away from a long period of unorthodox monetary policy during which rates were lowered even as inflation skyrocketed.

The turnaround began in June, when Turkey’s President Recep Tayyip Erdogan — who spearheaded the controversial policy stance — appointed former Wall Street banker Hafize Gaye Erkan as new central bank governor.

The key interest rate has been hauled up from 8.5% since then, and economists argue it needs to go further.

Turkey’s economy has been battered on several fronts in recent years. Inflation is forecast by the central bank to reach just over 60% by the end of 2023, while the Turkish lira has plummeted, making imports more expensive.

Liam Peach, senior emerging markets economist at Capital Economics, said signs now pointed to two further 500 basis point hikes at the central bank’s two remaining meetings this year. He said this should help real interest rates — adjusted for inflation — to enter positive territory before the end of next year.

“This would go a long way to sustaining investor optimism and keeping Turkey’s sovereign dollar bond spreads near multi-year lows,” Peach said in a note.

While recent policy tightening and communications have helped rebuild the central bank’s credibility, he said, positive real rates “will be needed for at least a few years in order to sustain any improvement in Turkey’s fundamentals and maintain investor confidence.”

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