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Turkish central bank raises rates by 250 basis points to 42.5%

The Central Bank of Turkey has announced another increase in its key interest rate, raising it by an additional 250 basis points to 42.5%. This decision was in line with expectations and reflects the ongoing effort to combat soaring inflation in the country.

Since June, when President Erdogan appointed a new governor to address high inflation through more orthodox policies, the central bank has raised its key rate by a substantial 3,400 basis points. The aggressive tightening cycle is part of the central bank’s commitment to fighting inflation.

While the central bank has signaled its intention to end the aggressive tightening cycle as soon as possible, some economists suggest that there may be room for one more rate hike before signaling the conclusion of the seven-month tightening cycle.

Policymakers emphasize that the central bank expects to complete the tightening cycle soon but remains prepared to maintain monetary tightness as long as necessary to ensure sustained price stability. The policy is seen as being significantly close to the level required to establish a disinflation course.

In terms of inflation expectations, the central bank anticipates inflation to increase from nearly 62% last month to a range of 70-75% in May 2024. It is then expected to decrease to about 36% by the end of the following year as tightening measures cool prices, with a strong warning.

The policy U-turn earlier in the year was also aimed at addressing chronic trade deficits, depleted foreign currency reserves, and attracting foreign investors after a prolonged exodus. However, the high borrowing costs associated with the aggressive rate hikes are presenting challenges for Turks, making it more difficult to roll over debt amid a cost-of-living crisis in the past two years. This reflects the complex trade-offs faced by policymakers in managing inflation, economic stability, and the impact on households and businesses.