In an unexpected move, Turkey's central bank raised its interest rates to 50 per cent on Thursday, citing concerns about worsening inflation. The bank pledged further tightening measures if inflation shows signs of significant and persistent deterioration.
Analysts interpreted the hawkish decision as a demonstration of the central bank's independence from political pressures, especially with local elections just 10 days away. The rate hike caused the lira to rally by up to 1.5 per cent against the dollar, reversing a trend of steady depreciation in the Turkish currency. Additionally, Turkey's dollar bonds experienced a rally.
Since last June, the central bank has increased its key one-week repo rate by 41.5 per cent points from 8.5 per cent, following Recep Tayyip Erdoğan's re-election as president and his shift towards a more orthodox economic policy.
The central bank emphasised that it would maintain a tight monetary stance until a significant and sustained decline in monthly inflation is observed and inflation expectations align with projected forecasts. It also stated its readiness to tighten policy further if significant and persistent inflation deterioration is anticipated.
The abrupt rate hike surprised the market, indicating Governor Fatih Karahan's determination to address high inflation levels after succeeding Hafize Gaye Erkan, who resigned unexpectedly.
Despite expectations of a decrease in inflation around mid-year, concerns about further rate hikes linger due to recent lira depreciation and declining foreign reserves. However, any potential policy adjustments are likely to occur after the municipal elections on 31 March, as Erdoğan's AK party seeks to reclaim key cities like Istanbul.
Following the elections, tighter fiscal policies are expected, which could exacerbate the economic challenges faced by Turks amid a prolonged period of high living costs.