Türkiye’s central bank announced a 250 basis points increase in its key interest rate, bringing it to a staggering 45 percent. This comes as part of its relentless efforts to combat double-digit inflation. The move, in line with economists’ expectations, marks the latest step in a series of rate hikes since May 2023, raising concerns among Turks who are grappling with a weakened currency and surging cost of living.
The inflation challenge
In December, inflation in Türkiye rose to a staggering 64.8 percent year-on-year, a further increase from 62 percent in November. Moreover, the Turkish lira hit a record low against the U.S. dollar in January, breaking the 30-lira mark for the first time. Therefore, the central bank’s decision to raise rates underscores the severity of the inflation crisis and the urgency to address it.
Amid speculations about the effectiveness of Türkiye’s interest rate hike, analysts predict that this may be the final increase for some time, especially with local elections on the horizon in March. However, Türkiye’s central bank indicated that it is necessary to maintain high-interest rates for an extended period to bring inflation down to single digits.
Interest rate hikes
Türkiye’s series of interest rate hikes, now totaling eight consecutive increases since May 2023, have taken a toll on Turkish citizens. The country is dealing with a significantly weakened currency, and living costs have soared. The recent years of high inflation are largely attributed to the previously loose monetary policy under the Ankara government. Hence, the lira had plummeted 38 percent against the dollar year-to-date and over 80 percent in the last five years.
In June 2023, a new finance team took charge, initiating a sharp pivot in Türkiye’s economic policy. Under the leadership of Türkiye’s central bank governor, Hafize Gaye Erkan, interest rates increased from 8.5 percent to the current 45 percent, reflecting a determined effort to stabilize the economy.
Doubts about effectiveness
Despite the significant interest rate hikes, there are doubts about their effectiveness in curbing Türkiye’s inflation. Capital Economics anticipates a drop towards 30-35 percent by year-end. Meanwhile, some analysts predict an increase to close to 75 percent in May before a potential decline. The cumulative tightening of 3650 basis points may not be sufficient to decisively address Türkiye’s persistent inflation challenges.
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Future expectations
Türkiye’s central bank suggests that this latest move might conclude the current tightening cycle. The bank stated that the current policy rate will remain until there is a substantial decline in monthly inflation. Moreover, the bank will wait until inflation expectations align with the projected forecast range. Analysts broadly anticipate Türkiye’s central bank to hold interest rates steady throughout the year, with no indications of rate cuts soon. The road to recovery for Türkiye’s economy seems challenging, and inflation must significantly recede before the central bank considers easing the current monetary stance.
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