Turkish Central Bank Surprises Markets with Interest Rate Hike

In a surprising move, the Turkish Central Bank raised its benchmark interest rate by 500 basis points, reaching a staggering 50%. This decision comes in contrast to market expectations of holding rates steady and marks the second meeting under the leadership of the new bank governor, Fatih Karahan.

The move was motivated by the pressing need to address the persistent inflationary pressures in Turkey. According to the Monetary Policy Committee’s statement released on Thursday, March 21st, February saw monthly inflation surpassing expectations, primarily driven by rising services inflation.

While there were some positive developments such as a slowdown in the imports of consumer goods and gold, contributing to an improvement in the Turkish current account balance, domestic demand remained resilient.

The statement highlighted that stubborn services inflation, along with ongoing inflation expectations, geopolitical risks, and food prices, continued to exert upward pressure on inflation.

With Turkey’s annual inflation rate soaring to 67% in February, speculation had been rife regarding the possibility of the central bank reverting to a monetary tightening stance.

The Monetary Policy Committee underscored its commitment to closely monitoring inflation expectations and price behavior, particularly in light of wage increases’ potential impact on inflation.

Furthermore, the committee affirmed its readiness to implement further interest rate hikes if necessary to ensure that inflation targets remain on track. This decisive action underscores the central bank’s determination to tackle Turkey’s inflation challenges head-on.