Turkey raises Policy Rate by 500 bps to 30 percent in a surprise move

September 21, 2023

Turkey’s Central Bank made a resolute move by elevating the one-week repo auction rate, also known as the policy rate, by an impressive 500 basis points. This decision saw the rate surge from 25% to a substantial 30%, marking the fourth consecutive rate hike during Governor Hafize Gaye Erkan’s tenure. The primary motivation behind this aggressive monetary policy stance was the urgent need to curb the country’s soaring inflation rate, which was hovering around a staggering 60%.

The Central Bank’s Board articulated its commitment to sustaining the momentum of monetary tightening. Their objective was clear: to swiftly establish disinflation, anchor inflation expectations, and regain control over the deteriorating pricing behavior within the economy. The persistent inflationary pressures were, in part, fueled by unfavorable developments. Notably, inflation had surpassed forecasts in the months of July and August. Contributing factors included robust domestic demand, inflexible service prices, escalating oil costs, and the persistent erosion of inflation expectations. These dynamics implied that inflation would likely remain perilously close to the upper boundary of the projected range in the Inflation Report by year-end.

The Central Bank’s evaluation attributed a significant portion of inflationary pressures to cost-driven factors and tax-related implications stemming from wages and exchange rate fluctuations. However, they anticipated a shift in the main inflation trajectory towards a decline in the coming months.

The Board exhibited unwavering determination to attain disinflation in alignment with the outlined path in the Report for the year 2024, leveraging the impact of their ongoing monetary tightening measures. They emphasized the pivotal role that various external and internal factors would play in supporting price stability. This included prospects such as increased foreign investments, enhanced external financing conditions, bolstered reserves, the contribution of tourism revenues to the current account, and growing demand for Turkish lira assets.

The policy rate’s calibration was intended to foster monetary and financial conditions conducive to reducing the underlying inflation trend and ultimately reaching the medium-term target of 5 percent. The Central Bank vowed to incrementally reinforce monetary tightening as necessary until a marked improvement in the inflation outlook was realized. This strategy underscored their commitment to addressing Turkey’s pressing inflationary concerns.