Turkey hikes interest rate to 50% in surprise move

Turkey hikes interest rate to 50% in surprise move
Turkey hikes interest rate to 50% in surprise move Copyright Canva
By James Thomas
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The increase comes after a pause last month which led experts to believe another freeze would follow suit. Yet chronic inflation still persists.

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Turkey's central bank has unexpectedly raised its key interest rate as the country continues to try and reign in soaring inflation.

The Central Bank of Turkey said on Thursday that it had raised the policy rate (or one-week repo auction rate) to 50%, up from 45%, due to higher-than-expected inflation in February.

"While imports of consumption goods and gold slowed down and contributed to the improvement in the current account balance, other recent indicators imply that domestic demand remains resilient," the bank said in a press release. "Stickiness in services inflation, inflation expectations, geopolitical risks, and food prices keep inflation pressures alive."

The bank said that the decision to start hiking interest rates again -following a brief pause last month which led market analysts to believe another hold was on the cards - came in response to a "deterioration in the inflation outlook".

Indeed, inflation is still running rampant in Turkey: core consumer prices rose at a rate of 72.89% in February over the same month in 2023, while annual inflation was last recorded at nearly 70% in February, the highest in 15 months.

"Tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range," the central bank said, adding that it expects to see disinflation in the second half of 2024.

The decision marks the first interest rate hike under the direction of the new central bank governor, Fatih Karahan.

President Recep Tayyip Erdoğan appointed Karahan as the new central bank governor in February, replacing Hafize Gaye Erkan, who resigned amid allegations of nepotism reported in local media. Erkan, Turkey’s first female governor and a former US-based bank executive, vehemently denied the accusations.

During Erkan's term, the bank significantly increased the benchmark interest rate from 8.5% in June to 45% in January.

Turkey has been suffering from chronic inflation due to years of Erdoğan's unorthodox policies. However, Karahan has said that getting inflation under control is his top priority, vowing to increase rates further if inflation surges.

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