Turkiye hikes rates to 45%, says done tightening policy

ISTANBUL: Turkiye’s central bank completed its aggressive tightening cycle with a 250 basis-point interest rate hike to 45% on Thursday, as expected, and said it would maintain current levels “as long as needed” to bring about the desired disinflation.

The bank has lifted its one-week repo rate by 3,650 points since June, when President Tayyip Erdogan appointed former U.S. banker Hafize Gaye Erkan as its governor to conduct a sharp pivot toward more orthodox policies.

“(T)he monetary tightness required to establish the disinflation course is achieved and…this level will be maintained as long as needed,” the bank said after its monthly monetary policy committee meeting.

“The current level of the policy rate will be maintained until there is a significant decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range,” it said.

It will reassess its stance “if notable and persistent risks” to the inflation outlook emerge, it added.

Turkiye central bank targets 50% lira deposits in banks in 2024

The central bank expects inflation to rise from near 65% last month to 70-75% in May, before dipping to about 36% by the end of this year as tightening cools prices.

The lira weakened slightly after the statement to 30.2865 against the dollar, having hitting a series of record lows in recent weeks.

The currency has suffered a sustained slide since 2018, weakening sharply last summer as authorities loosened their grip on it. Depreciation slowed in the autumn but has not halted.

The bank said the existing level of domestic demand, stickiness in services inflation, and geopolitical risks were keeping inflation pressures alive but the decline in the underlying trend of monthly inflation has continued.

In December, the bank downshifted tightening to 250 basis points from the previous 500 basis point hikes, and said at the time it would complete the tightening cycle as soon as possible.

All 25 respondents in a Reuters poll had expected the central bank to hike rates to 45% and expect no more rate hikes after January.

Earlier this month, Erkan said to foreign investors that Turkiye is committed to achieving disinflation and is prudently continuing to increase foreign exchange reserves and attract capital inflows.

Economists say increased natural gas consumption in winter and the larger-than-expected minimum wage hike of 49% for 2024, which affects some 7 million workers, is expected to push inflation higher in the coming months.