Turkey's central bank delivers bold rate hike amid inflation concerns

Turkey's central bank aggressively raised its key interest rates by 500 basis points, elevating it to a staggering 50% on Thursday. 

This decision comes in light of a worsening inflation outlook, with the bank signaling its readiness to enforce further tightening if inflationary pressures continue to escalate. 

This significant policy adjustment arrives just ten days ahead of the much-anticipated nationwide local elections, underscoring the central bank's assertion of its autonomy from political influences and its commitment to combating the inflation rate, which is on the verge of reaching 70%.

A sharp increase in rate 

The sharp rate increase sparked a rally for the Turkish lira, which appreciated as much as 2%. 

It stabilized at around 31.9 against the US dollar and reversed a trend of continuous decline in recent weeks. Concurrently, Turkey's dollar-denominated bonds experienced an upsurge in value.

Piotr Matys, a senior FX analyst at In Touch Capital Markets in London, described the central bank's decision as having "stunned the market," highlighting it as a clear indicator of Governor Fatih Karahan's resolve. Karahan, who succeeded Hafize Gaye Erkan following her unexpected resignation, is seen as determined to curb the soaring inflation rates. 

Since last June, following President Tayyip Erdogan's election victory and subsequent policy pivot towards more orthodox economic strategies, the bank has escalated its key one-week repo rate by 4,150 basis points from an initial 8.5%.

The central bank has pledged to maintain a strict monetary stance until it observes a "significant and sustained decline" in the monthly inflation trend and until inflation expectations align closely with its forecast range.

It also stated its readiness to implement further tightening if a considerable and persistent worsening in inflation is anticipated. 

The rate increase is part of a broader strategy to tighten credit conditions, which includes modifications to reserve requirements and has led some banks to reduce loan offerings.

With tighter fiscal policies anticipated post-elections, these measures are set to further squeeze credit availability, exacerbating the financial strain on Turkish citizens amid a protracted cost-of-living crisis.

Finance Minister Mehmet Simsek's recent promises to support the central bank in its fight against inflation underscore a concerted effort to assert a more aggressive stance on monetary policy, election timeline notwithstanding.

 The central bank's monthly survey revealed a year-end inflation expectation of 44.19%, surpassing the bank's own 36% forecast.