The Central Bank of the Republic of Türkiye (CBRT) on Thursday hiked its benchmark policy rate by 250 basis points in the seventh consecutive rise under the new governor and shift in policy making.
The central bank raised its one-week repo rate to 42.5% from 40%, meeting economists’ expectations following three hikes of 500 basis points in the previous three meetings, but signaled it expects “to complete the tightening cycle as soon as possible.”
Economists polled by Anadolu Agency (AA) in a survey last week estimated the bank would deliver a rate hike of 250 basis points. Similarly, the key rate was expected to climb to 42.5%, according to the median response of 12 institutions in a Reuters poll.
The Monetary Policy Committee (MPC) decided to reduce the pace of monetary tightening, as the monetary tightness is significantly close to the level required to establish the disinflation course, the central bank said in the statement.
“The committee anticipates to complete the tightening cycle as soon as possible,” it added, pledging that monetary tightness would be maintained “as long as needed to ensure sustained price stability.”
The central bank expects inflation to rise from nearly 62% last month to 70%-75% in May, before dipping to about 36% by the end of next year as tightening cools prices.
During the budget discussions, Minister Mehmet Şimşek
Inflation hit a 24-year peak of 85% last year and surged again in recent months as the Turkish lira weakened after a long easing cycle that has been reversed by the new economy administration appointed after the May elections.
Since June, when President Recep Tayyip Erdoğan appointed former Wall Street banker Hafize Gaye Erkan as the governor of the CBRT, the key rate was lifted by a cumulative 3,400 basis points to tackle the inflation.
Authorities have repeatedly conveyed their aim of ensuring disinflation, expecting it as of the second half of the next year.
“We have put forward a program. We are trying to turn global difficulties into opportunities for Türkiye, we are increasing predictability for this, and our biggest priority for this is price stability. Therefore, the main goal of the medium-term program is to ensure a permanent decrease in inflation,” Treasury and Finance Minister Mehmet Şimşek said in the Turkish Parliament meeting Wednesday.
“We are determined, and we plan to reduce inflation permanently, this is the top priority goal of our MTP program. The monetary tightening process initiated for this purpose continues. We support monetary tightening with selective credit and quantitative tightening steps,” he added.
“Headline inflation edged up in November and remains in line with the outlook presented in the most recent Inflation Report,” the central bank further said, adding that the existing level of domestic demand, stickiness in services inflation and geopolitical risks “keep inflation pressures alive.”
However, the bank said that “recent indicators suggest that domestic demand continues to moderate as monetary tightening is reflected in financial conditions.”
The Turkish lira was largely stable after the seventh straight monthly rate hike, which brought the policy level to its highest in two decades.
In a sign of confidence, Türkiye’s five-year credit default swaps, which measure default risk, dipped below 300 basis points this week from near 700 in May.
Türkiye’s pivot back to conventional fiscal policies could pay off with record debt issuance and the continued return of foreign investors in 2024, JPMorgan Managing Director Stefan Weiler told Reuters earlier Thursday.
“From our side, we see Türkiye as a potential big story for next year,” Weiler, the head of JPMorgan’s CEEMEA debt capital markets noted.
“As long as market conditions globally are constructive, and as long as there’s no reversal of some of the pivots that were made, Türkiye should see the busiest year ever in terms of international capital markets issuance activity,” Weiler said.
“Foreign capital already started flowing back and it seems like the tide has turned for Türkiye,” he said.