Residents wait at a bus stop under a large Turkish flag on Sunday, April 30, 2023 in Istanbul, Turkey.
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The rate hike is the latest step in Turkey’s monetary policy makers’ continued fight against double-digit inflation.
Turkey’s inflation rate rose from 62% in November to 64.8% year-on-year in December, and the country’s currency, the lira, hit a record low against the US dollar in early January, exceeding $1 = $30. . first time.
Analysts expect this to be the last rate hike for some time, especially with local elections looming in March.
Liam Peach, a senior emerging markets economist in London, said: “Encouragingly, this reporting is relatively hawkish, suggesting that policymakers will have to keep interest rates high for an extended period of time to succeed in bringing inflation back to single digits.” “It suggests that they recognize the need to maintain high standards.” Based firm Capital Economics said in a note. “Our fundamental view remains that the central bank will keep interest rates on hold for the rest of the year.”
The Central Bank of the Republic of Turkey itself also indicated that this was likely the end of the tightening cycle, stating of its decision: “The monetary tightening necessary to establish a course of deflation has been achieved… The current level of the policy rate will be maintained until the underlying trend in monthly inflation has declined significantly and inflation expectations have converged to the expected forecast range.
The central bank’s move is the latest in a series of interest rate hikes, the eighth in a row since elections in May 2023, and comes as the country faces a dramatic currency depreciation and rising costs of living. It has become a pain for Turks.
Turkish Central Bank Governor Hafise Gey Erkan answers questions during a press conference on the Inflation Report 2023-III in Ankara, Turkey, July 27, 2023.
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The high inflation of the past few years is the result of the Turkish government’s stubborn monetary easing policy. The Turkish lira has fallen 38% against the dollar since the start of this year, and more than 80% against the dollar over the past five years.
With the appointment of a new finance team last June, Turkey’s central bank embarked on a sharp U-turn, raising interest rates under the supervision of Turkish Central Bank Governor Hafizeh Erkan. Türkiye’s benchmark interest rate has since been raised from 8.5% to 45%.
Still, some observers believe that won’t be enough to effectively curb inflation.
Capital Economics expects Turkey’s inflation rate to fall from the current 65% “toward 30-35% by the end of the year,” while Bartos Sawicki, market analyst at Konotoxia Fintech, said: It expects inflation to reach nearly 75% in May and then begin to decline.
“The cumulative 3,650 basis points of tightening may not be enough to decisively contain Turkey’s long-standing inflation problem,” Sawicki said, explaining that it is “driven by an unhealthy combination of loose monetary policy, deep negative real interest rates and persistent lira weakness.”
Analysts generally expect the central bank to keep interest rates on hold for the rest of the year, with no rate cuts for the time being.
“Inflation rates and inflation expectations need to fall significantly before the central bank starts cutting rates,” Peach said.