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Turkey’s central bank unexpectedly raised its key interest rate from 42.5 per cent to 46 per cent on Thursday, in its first monetary policy meeting since the arrest of President Recep Tayyip Erdoğan’s main political rival and the Trump administration unleashed a global trade war.
The surprise decision, which Turkey’s central bank described as a show of monetary “decisiveness”, comes after political instability hammered domestic assets last month and sent the lira currency to a record low.
The bank reversed a previous cycle of rate cuts, also raising its overnight lending rate to 49 per cent from 46 per cent, and said it would tighten policy further if there were any signs of rising inflation.
The lira rose against the dollar after the bank announced its decision, which investors said was designed to reassure investors after the recent sell-off.
“This is a sensible move that is probably worth even more for [its] strong signal of commitment to an orthodox approach [to monetary policy] than the hike itself,” said Kieran Curtis, head of emerging markets local currency debt at Aberdeen Investments. “Maintaining attractiveness of lira deposits is crucial,” he added.
Earlier this month, President Donald Trump announced a so-called reciprocal tariff of 10 per cent levelled on all Turkish goods imported to the US, the lowest rate he applied to trade partners.
Turkey is 18 months into an economic stabilisation programme that has sought to squash runaway inflation caused by the ultra-low interest rate policy previously favoured by Erdoğan.
The programme faced its most severe market test on 19 March with the arrest of Istanbul mayor Ekrem İmamoğlu, which sparked a market panic and Turkey’s largest street protests in a decade.
Investors and domestic savers fled from the lira and into foreign currency. In response, the bank held an emergency rate-setting meeting, where it suspended lending at its key repo rate and raised its overnight lending rate to 46 per cent, which in effect became the main interest rate.
The lira has since stabilised at around 38 to the US dollar, but the central bank has since spent more than $46bn intervening to support the currency, according to estimates by Bürümcekçi Research and Consultancy.
“Recent events — domestic politics and the global tariff war — have strengthened the Turkish central bank’s mandate to do whatever it takes to fight inflation. Reserve loss was [also] too much,” commented Tim Ash, a longtime Turkey watcher at BlueBay Asset Management.
“Credit to the [central bank’s] governor and . . . team,” Ash added of Thursday’s decision. “They proved their independence in doing the right thing.”
A cost of living crisis caused by high inflation has hurt Erdogan’s poll ratings, and, so far, he has allowed officials free rein to get inflation down, even if it has meant high interest rates.
The bank said in a statement that its “tight monetary stance will be maintained until price stability is achieved via a sustained decline in inflation”. It added: “Monetary policy . . . will be tightened in case a significant and persistent deterioration in inflation is foreseen.” It also said it would resume lending at its key repo rate, which was suspended after İmamoğlu’s detention.
“It’s clear that the central bank’s easing cycle has hit a major roadblock, and it could take some time before the easing cycle is restarted,” Nicholas Farr, emerging Europe economist at Capital Economics, said.
Turkish inflation last month fell more than expected to 38 per cent. The bank is targeting 24 per cent by the end of the year.