Turkey Hikes Rate Again as It Tries to Get Grip on Inflation

Turkey’s central bank delivered another sizable interest-rate hike، matching expectations but disappointing a market that was pricing in more aggressive moves to curb inflation running at almost 60%.

The lira reversed gains after the Monetary Policy Committee raised rates for a fourth straight time to bring its benchmark to 30% from 25%. It reiterated plans to proceed “in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.”

But a tightening cycle that would have been unthinkable just months ago is no longer proving enough in the face of an escalating cost-of-living crisis that’s pushing Turkish interest rates deeper below zero when adjusted for inflation. 

On track for Lira's worst day

With the lira on track for its worst day against the dollar this month، the market is putting the central bank on notice over a decision that looks “insufficient،” according to Henrik Gullberg، a macro strategist at Coex Partners Ltd. The lira was trading about 0.3% weaker versus the US currency as of 4:07 p.m. in Istanbul. 

“The Turkish central bank needs to over-deliver in order to make a difference،” Gullberg said.

The stakes are high as President Recep Tayyip Erdogan’s new team of technocrats tries to woo investors who’ve shunned Turkey after years of erratic and unconventional policies knocked the economy off balance. 

Initially criticized for timid rate increases after Governor Hafize Gaye Erkan’s appointment in June، the central bank has upped their pace starting with last month’s decision to hike by 750 basis points that exceeded most forecasts.

In a statement accompanying the move on Thursday، the central bank said it’s “determined to establish the disinflation course in 2024.”

“We maintain our earlier call that the central bank will lift rates to 35% by year-end in more ‘gradual’ steps — guidance echoed in the release accompanying the Sept. 21 decision. Ahead of local elections next March، we expect the central bank to hold rates at 35% through 1Q24، then raise borrowing costs further in 2Q24.”

The latest decision follows Erdogan’s apparent endorsement of monetary tightening this month، despite his long-held beliefs that ultra-low rates could curb inflation. Finance Minister Mehmet Simsek has since told investors in New York that tackling inflation is Turkey’s “No. 1 priority.” 

Erdogan’s new vision has been a tough sell abroad، however، because of his track record of prioritizing economic growth and ousting three consecutive central bank governors for not being dovish enough. The lira is still down around 31% against the dollar this year، one of the worst performers among its peers in emerging markets.

Inflation rising rapidly

“Inflation has been rising more rapidly than the policy rate since July،” said Thomas Gillet، lead analyst on Turkey at Scope Ratings. “Reversing that trend so that the central bank gets ahead of the curve is certainly one of the biggest challenges currently.”

The inflation outlook has recently grown more dire، with monthly price growth leaping higher by over 9 percentage points in July and August. A survey conducted by the central bank found analysts expect inflation at close to 70% at the end of this year، higher than the government’s estimate of 65%.

‘Upside Risks’

“As the strong course of domestic demand and the stickiness of services inflation persist، the increase in oil prices and the ongoing deterioration in inflation expectations pose additional upside risks to inflation،” the MPC said on Thursday. 

“Increasing domestic and foreign demand for Turkish lira-denominated assets” is among factors that “will contribute significantly to price stability،” it said.

Marek Drimal، Societe Generale’s lead CEEMEA strategist، called the 500 basis-point rate hike “a solid increase” but warned the lira will likely come under pressure in the months ahead.

“Importantly، the tone and the message of the MPC statement also suggests further gradual rate hikes are in the pipeline،” he said. “With that said، the lira is likely to see further weakening in the fourth quarter as the negative seasonality of the external balance kicks in again، while real rates remain deeply negative.”