Turkey's Central Bank surprises with interest rate hike to 40 pct

Reuters

Turkey's central bank on Nov. 20 delivered a larger-than-expected 500 basis point interest rate hike, lifting its benchmark to 40% from 35% but also flagging that the pace of monetary tightening was set to slow down and the end of the cycle was in sight.

"The Committee assessed that the current level of monetary tightness is significantly close to the level required to establish the disinflation course," the bank said following its monetary policy committee meeting.

In a Reuters poll, most economists predicted a 250 basis-point hike, while three forecast a 500-point hike. The bank has raised its one-week repo rate (TRINT=ECI) by 3,150 basis points since June.

"The pace of monetary tightening will slow down and the tightening cycle will be completed in a short period of time. The monetary tightness will be maintained as long as needed to ensure sustained price stability," the bank said.

President Recep Tayyip Erdoğan chose former Wall Street banker Hafize Gaye Erkan as central bank chief after his May re-election and she has led a policy U-turn, vowing to raise rates as high as needed to cool inflation.

The bank's previous policy of cutting interest rates despite high inflation triggered a currency crisis in 2021, after which the government introduced a scheme to protect lira deposits from currency depreciation.

"A final 250bp hike in December now looks likely," said Liam Peach at Capital Economics. "The past month has brought further signs that Turkey’s economy is rebalancing in response to the policy U-turn in May."

EBRD President Odile Renaud-Basso told Reuters that Turkey's policy rate "will need to remain at a high level for quite a long time to really rebuild confidence."

The lira firmed to as far as 28.51 against the dollar following the statement and stood at 28.7685 at 12.00 GMT.

Central bank officials told Reuters that Turkey is seeing an inflow of funds to the lira from large corporate investors based on the west coast of the United States and that talks with foreign funds indicated such inflows would continue.

The central bank also announced other measures, introducing an upper limit on rediscount credit interest rates for exports and forex-bringing services in a bid to support access to financing for exporting companies.

Inflation stood at 61.36% in October and is expected to continue rising and peak in May 2024 at around 70-75%, according to the central bank which raised its year-end inflation forecasts for this year to 65% earlier this month.

President Erdoğan in the past repeatedly criticized tight monetary policy, describing himself as an enemy of interest rates but has said in recent months that tight policy would help bring down inflation.

Bankers told Reuters this week that banks' deposit rates, already above 45%, are expected to rise further by year-end as the central bank takes additional steps to tighten liquidity and lenders spruce up their year-end balance sheets.