Turkey raises rates to 45% but signals end to monetary tightening

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Turkey has increased interest rates to 45 per cent as policymakers signalled that a eight-month campaign of big rises in borrowing costs was over, with the country’s prolonged inflation crisis expected to ease this year.

The central bank on Thursday boosted its benchmark one-week repo rate by 2.5 percentage points, in line with expectations and marking the eighth increase in borrowing costs since June.

The central bank’s policy-setting committee said that although inflation remained at nearly 65 per cent and might rise further in the coming months, “recent indicators suggest that domestic demand continues to moderate in line with the projected disinflation process as monetary tightening is reflected in financial conditions”.

It added: “Taking into account the lagged impact of monetary tightening, the committee assesses that the monetary tightness required to establish the disinflation course is achieved and that this level will be maintained as long as needed.”

The move by the central bank is the latest sign of how Turkish President Recep Tayyip Erdoğan, who once called high interest rates the “mother and father of all evil”, has undertaken an abrupt shift towards more conventional economic policies following his re-election in May.

The central bank, helmed by former Goldman Sachs banker Hafize Gaye Erkan, said inflation could rise above 70 per cent by summer, but would then cool rapidly to 36 per cent by year-end.

Goldman Sachs said this month it expected inflation to ease this year more rapidly than the central bank expected. The Wall Street bank said in a note to clients that it expected inflation to fall to 33 per cent by the end of 2024.

Turkey has also launched a wide-ranging programme of economic reforms aimed at rebuilding the central bank’s foreign currency war chest and cooling rampant consumer demand that had pushed Turkey’s current account deficit to record levels.

Erkan, who has played a vital role in the economic overhaul, faced one of the most serious tests of her seven-month tenure after local media reported allegations in recent days that her father had taken an unofficial role at the central bank and sacked an employee.

The central bank’s first female governor strongly denied the accusations, calling them “unfounded” and “completely unacceptable”. Erdoğan appeared to throw his support behind Erkan on Wednesday, when he said unnamed assailants were “conducting campaigns to disrupt the climate of confidence and stability that we have achieved with great difficulty in the economy with unreasonable rumours”.

The saga, which comes as campaigning for key local elections in March heats up, was closely scrutinised by international and local investors who have been burnt in the past when Erdoğan has sacked central bank chiefs for acting against his long-held objection to high rates.

Foreign investors, who have largely abandoned Turkey’s domestic markets in recent years, have broadly applauded the new economic programme.

Pimco, one of the world’s biggest bond fund managers, told the Financial Times this month that it was “very constructive” on Turkey’s domestic assets and had been wading into its local debt market in recent months.

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