Turkey: Central Bank shocks markets with aggressive rate hike in August
On 24 August, the Central Bank of the Republic of Turkey (CBRT) raised its one-week repo rate from 17.50% to 25.00%. The decision caught markets off guard due to the substantial magnitude of the increase. This frontloading of rate hikes solidifies the notion that Turkey is distancing itself from past unorthodox economic policies.
The CBRT highlighted that its decision was driven by the recent uptick in underlying inflation, which was itself driven by robust domestic demand, intensified cost pressures from wages and exchange rates, the sustained nature of services inflation, and taxes. Additionally, the Bank outlined that inflation expectations increased more than previously anticipated. Nevertheless, the Committee maintains its projection that disinflation will take place by 2024.
The Bank’s forward guidance remained hawkish. The CBRT reiterated its intention to continue with monetary tightening as necessary until there is a substantial improvement in the inflation outlook. Our panelists expect the Bank to deliver additional hikes in the coming meetings.
The next Monetary Policy Committee decision is scheduled for 21 September.
Muhammet Mercan, chief economist at ING, commented:
“Overall, the latest rate action is significant and will raise expectations for the final policy rate. Given the need for rebalancing to control inflation and reduce external imbalances, the CBRT’s move and the likely impact of this move on deposit and loan rates will be an important step towards tightening financial conditions and controlling domestic demand.”
Considering measures other than policy hikes, analysts at Goldman Sachs commented:
“The Committee […] stated again that it will continue the monetary tightening process, which will in our view continue to be supported by the introduction of new measures and/or instruments for now. We continue to think that additional measures will be needed to allow banks to raise their deposit rates to levels necessary to incentivise locals to save in Turkish lira without FX protection.”