Turkey raises interest rate to 50% amid soaring inflation

Reuters/Umit Bektas

Turkey’s central bank has raised its key interest rate by 500 basis points to 50 percent from 45 percent following a deteriorating inflation outlook.

The move comes after monthly inflation was higher than expected in February, driven by services inflation, the monetary policy committee (MPC) said in a statement. 

“Stickiness in services inflation, inflation expectations, geopolitical risks and food prices keep inflation pressures alive,” it said.

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Earlier this month the Turkish Statistical Institute said inflation reached 67.07 percent in February.

A tight monetary stance will be maintained until a “significant and sustained” decline in monthly inflation is observed, the MPC said.

Monetary policy stance will be tightened if a significant and persistent deterioration in inflation is foreseen, it added.

The central bank expects the tight monetary stance to lower monthly inflation through moderation in domestic demand, real appreciation in the Turkish lira and improvement in inflation expectations. 

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Consequently, disinflation will be established in the second half of 2024, the statement said.

Ratings agency Fitch has already upgraded Turkey’s long-term foreign currency issuer default rating to “B+” from “B”, driven by greater-than-expected monetary policy tightening to control inflation.

The ratings agency said that inflation expectations have eased and external liquidity risks have moderated, reflecting more favourable external financing conditions, higher reserves, lower forex-protected deposits and a narrowing current account deficit.

However, Fitch forecasts inflation to average 58 percent in 2024 and finish at 40 percent, above the central bank’s intermediate target of 36 percent.

Last month finance minister Mehmet Şimşek said Turkey’s measures to curb inflation will prove effective and should see it decline in the second half of this year, local media reported.

The medium-term programme, launched in September 2023, intends to achieve price stability and single-digit inflation, he said.