Turkey’s central bank on Thursday surprised the market with a larger-than-expected interest hike as it ramped up its fight against inflation and efforts to support the slumping lira.
The bank lifted its policy rate by 5.0 percentage points to 40 percent on the sixth month of a belt-tightening cycle that has more than quadrupled borrowing costs.
Most analysts had expected the bank to raise its rate by 2.5 percentage points.
“Really impressive move by the (central bank) … getting well ahead of expectations,” emerging markets economist Timothy Ash remarked in an emailed note.
But the bank also gave a strong signal that it was reaching the limits of how high its policy rate will go.
“The current level of monetary tightness is significantly close to the level required to establish the disinflation course,” the bank said in a statement.
“Accordingly, the pace of monetary tightening will slow down and the tightening cycle will be completed in a short period of time.”
Turkey’s interest rates are now the highest of President Recep Tayyip Erdogan’s two decades in power and above those in almost all other emerging economies in the world.
Policymakers expect them to remain elevated at least through the middle of next year.
They underscore the depths to which Turkey’s economy has plunged after Erdogan decided to implement his unorthodox theory that high interest rates cause inflation into real life.
Conventional economics dictates that the exact opposite is true.
Turkey’s official annual inflation rate peaked at 85 percent in October 2022 and climb back up to 61 percent last month.
And the lira has lost more than 70 percent of its value against the dollar since Erdogan began to unleash his experiment just over two years ago.
Erdogan reversed track after surviving a runoff presidential election in May that he won after showering his supporters with giveaways and pay increases that threatened to make Turkey’s inflation problem even worse.
He installed a new team of market-friendly economists that had good reputations on Wall Street and were cheered on by spooked foreign investors.
Finance Minister Mehmet Simsek and central bank governor Hafize Gaye Erkan have tried to rebalance the economy with conventional prescriptions aimed at curing the cost-of-living crisis and easing the life of businesses and banks.
Simsek has spent the past few months shuttling between world financial capitals and the Middle East selling his plan to big investors and sovereign wealth funds.
And Erkan has been trying to calibrate rate hikes to levels that both fight inflation and avoid infuriating Erdogan.
The Turkish leader appears increasingly happy with his new team.
He told a group of Turkish reporters this week that the economy could soon “enter a virtuous cycle” of disinflation and lira strength.
“There is a high probability that the Turkish lira will gain value in real terms,” he said.
“We will gain investor confidence with our sound policies and structural reforms.”
