In an unexpected move, the Central Bank of Türkiye (TCMB) responded to higher-than-expected inflation in February by announcing a significant increase in the policy rate. On Thursday, the TCMB raised key interest rate from 45 percent to 50 percent.
The bank stated in a press release that while imports of consumption goods and gold had slowed down, indicating an improvement in the current account balance, other indicators suggested that domestic demand remained strong.
Factors such as stickiness in services inflation, inflation expectations, geopolitical risks, and food prices were cited as contributing to ongoing inflation pressures.
Read more: Türkiye: New Central Bank Governor holds interest rates steady at 45 percent
The decision to raise interest rates followed a pause last month, which had led market analysts to anticipate no change. The bank explained that the move was prompted by a deterioration in the inflation outlook. In fact, inflation in Türkiye remains high, with core consumer prices rising by 72.89 percent in February compared to the same month in 2023. Annual inflation stood at nearly 70 percent in February, the highest level in 15 months.
TCMB’s commitment to tight monetary stance
TCMB highlighted that it would maintain a tight monetary stance until a significant and sustained decline in monthly inflation and convergence of inflation expectations to the projected forecast range were observed. It expressed the expectation of seeing disinflation in the second half of 2024.
This interest rate hike marks the first under the leadership of the new central bank governor, Fatih Karahan. Karahan was appointed by President Recep Tayyip Erdoğan in February, replacing Hafize Gaye Erkan, who resigned amidst allegations of nepotism. Erkan, the first female governor of Türkiye and a former US-based bank executive, vehemently denied the accusations.
Türkiye’s battle with chronic inflation
During Erkan’s tenure, the central bank significantly increased the benchmark interest rate from 8.5 percent in June to 45 percent in January. Türkiye has been grappling with chronic inflation due to unorthodox policies implemented during Erdoğan’s administration. However, Governor Karahan has prioritized bringing inflation under control and has pledged to raise rates further if inflation surges.
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