Turkey central bank stuns market with 500-point rate hike to 50%
Turkey’s central bank unexpectedly raised interest rates by 500 basis points to 50% on Thursday, citing a deteriorating inflation outlook and pledged to tighten further if significant and persistent deterioration in inflation is foreseen.
The hawkish surprise came 10 days before nationwide local elections and was seen by analysts as a signal that the central bank was independent from any political constraints and determined to tackle price rises.
In response the lira currency rallied as much as 1.5% to 31.91 against the dollar, reversing weeks of steady declines, and Turkey’s dollar bonds extended a rally.
The bank has now raised its key one-week repo rate by 4,150 basis points from 8.5% since last June, following President Tayyip Erdogan’s victory in May elections and U-turn towards greater orthodoxy in economic policy.
The “tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range,” it said.
Policy “will be tightened in case a significant and persistent deterioration in inflation is foreseen,” it added after the monthly meeting of its monetary policy committee.
To reinforce the tightening move, the central bank also adjusted its policy operational framework, setting the overnight borrowing and lending rates 300 basis points below and above the repo rate.
The rate hike “stunned the market,” said Piotr Matys, senior FX analyst at In Touch Capital Markets in London.
“Today’s decision is a very strong signal that Governor (Fatih) Karahan, who took over from (Hafize Gaye) Erkan when she unexpectedly resigned, is determined to bring staggeringly high inflation under control,” he said. [Reuters]
