Turkish Central Bank raises interest rate to 45 percent, halting monetary tightening cycle

Turkey’s Central Bank increased its policy rate by 250 basis points from 42.5 percent to 45 percent. The bank stated that it has attained the necessary monetary tightness for disinflation and would maintain this level as long as needed.

Duvar English

Turkey's Central Bank lifted its key interest rate by 250 basis points to 45 percent during the Monetary Policy Committee meeting chaired by governor Hafize Gaye Erkan on Dec. 21.

“The existing level of domestic demand, stickiness in services inflation, and geopolitical risks keep inflation pressures alive,” the bank stated after the meeting.

The bank once again backed the monetary tightening cycle that the new economic administration started after the May 2023 elections and assessed that its policies resulted in the decline in the monthly inflation. 

However, the central bank underscored that it would maintain the current policy rate until a substantial decline in the monthly inflation trend and the convergence of inflation expectations to the projected forecast range. 

The bank added that it would reassess monetary policy if notable and persistent risks to the inflation outlook emerge, aiming to create conditions necessary for achieving the five percent inflation target in the medium term.

The bank stated that “external financing conditions, strengthening in foreign exchange reserves, rebalancing in current account balance, and demand for Turkish lira denominated assets” have continued to contribute to exchange rate stability and the effectiveness of monetary policy. 

At its meeting in June 2023, the Central Bank raised the policy rate by 650 basis points from 8.5 percent to 15 percent, the first rate hike in 27 months. Thus, the interest rate, which was 8.5 percent before the elections, was raised for the eighth time in a row.

Previously, the economic administration adopted President Recep Tayyip Erdoğan’s unorthodox stance of “lowering interest rates to control inflation.”

Since June 2023, the bank raised interests in every meeting. However, the inflation rate has been kept increasing throughout the second half of 2023.

The state-run Turkish Statistical Institute (TÜİK) reported the annual inflation rate as 64,77% for 2023 and a monthly inflation rate of 2.93% in December.

The disinflation would start after it peaked at around 70%-75% in May 2024, according to the inflation forecast of the bank.

After the interest rate decision of the Central Bank, dollar was traded at 30.29 Turkish liras and euro at 33.07 liras.