Turkiye hikes rates by 250 pts to 42.5% with end in sight

ISTANBUL: Turkiye’s central bank lifted its key interest rate by 250 basis points to 42.5% on Thursday as expected, and said the aggressive tightening cycle will be done “as soon as possible” as it faces down years of soaring inflation.

The bank has lifted its one-week repo rate by 3,400 points since June, when Turkish President Tayyip Erdogan appointed former Wall Street banker Hafize Gaye Erkan as its governor to conduct a sharp pivot toward more orthodox policies.

It had hiked by 500 basis points in each of the last three months but last month said tightening would soon end. After halving the pace on Thursday, it said “monetary tightness is significantly close to the level required to establish the disinflation course.”

All 12 respondents in a Reuters poll had expected the central bank to hike rates to 42.5%. They forecast a bit more policy tightening early next year before easing in the second half.

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The central bank expects inflation to rise from near 62% last month to 70-75% in May, before dipping to about 36% by the end of next year as tightening cools prices.

The policy U-turn is also meant to address chronic trade deficits and depleted forex reserves and to attract foreign investors after a years-long exodus, for which there are signs of interest from big asset managers such as Amundi.

The high borrowing costs are already weighing on Turks who are having a harder time rolling over the debt they relied upon to deal with a cost-of-living crisis in the last two years.

Erdogan’s past insistence on cutting rates despite rising prices sparked several currency crashes and sent inflation to two-decade highs. Though he backs the current policy, he has fired four central bank chiefs in as many years, raising questions over whether Erkan can stay the course.

In a sign of confidence that she can, Turkiye’s five-year credit default swaps, which measure default risk, briefly dipped below 300 basis points this week from near 700 in May. JPMorgan told Reuters that Turkiye could issue record debt in 2024.