Turkey's central bank raised its policy rate by 500 basis points to 35% as expected on Oct. 26, tightening aggressively for a third straight month as it steps up efforts to rein in inflation that has soared for years.
The bank's policy committee repeated it is ready to raise rates further as needed to curb inflation, which climbed to an annual rate of 61.53% in September and is expected to rise into next year.
The one-week policy repo rate (TRINT=ECI) has risen by 2,650 basis points since June and most analysts anticipate the central bank (CBRT) will tighten further in order to narrow the gap with inflation.
"Bang on the consensus. The CBRT delivers again. It feels like we will see another two 500bps hikes now to year end, with policy rates likely ending at 45%," said Timothy Ash, senior strategist at BlueBay Asset Management.
The central bank said it "decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behaviour."
The lira weakened slightly to 28.156 against the dollar after the announcement. It has weakened some 70% in two years, largely due to President Recep Tayyip Erdoğan's long-standing opposition to high rates and influence over the central bank.
The bank said inflation readings were above expectations in the third quarter, with the strong course of domestic demand, the stickiness of services inflation and the deterioration in expectations putting upward pressure on inflation.
However, it said the underlying trend in monthly inflation was evaluated as being on course to decline.
The policy change
Erdoğan chose former Wall Street banker Hafize Gaye Erkan as central bank chief after his May re-election. She has led a policy U-turn to relieve an economy strained by depleted FX reserves and surging inflation expectations.
Erdoğan's previous support for low interest rates despite surging prices brought on a currency crisis in late 2021 and pushed inflation above 85% last year. Inflation is seen ending this year at 68%.
In past years, Erdoğan has repeatedly slammed tight monetary policy, describing himself as an enemy of interest rates, but he has recently said tight policy will help bring down inflation.
The lira weakened again this summer as the new economic team under Finance Minister Mehmet Şimşek eased the state's grip on foreign exchange markets and moved away from unorthodox policies and regulations. It has lost one-third of its value this year.
The central bank itself has tightened credit selectively and started to began rolling back a costly scheme, adopted to halt the late-2021 currency crash, that protects lira deposits against foreign exchange depreciation.