The Central Bank of the Republic of Türkiye (CBRT) Thursday increased its key policy rate, another sign of commitment to a traditional path of battling inflation but still falling below expectations.
Accordingly, the bank raised its policy rate by lower-than-expected 250 basis points to 17.5% from 15%.
The bank's Monetary Policy Committee (MPC) decided "to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration of pricing patterns."
The bank said it would keep raising borrowing costs "as much as needed in a timely and gradual manner" to ease inflation.
Differentiating from the earlier statements, the bank also said that new tax hikes will have an additional negative impact on inflation. Yet it added that the foreign direct investments (FDIs), the visible improvements in the external financing conditions, the increase in central bank reserves and the tourism revenues are expected to significantly contribute to the price stability while ensuring the balance in the current account.
In June, the bank had increased its policy rate by 650 basis points to 15% in the first hike in 27 months during the first meeting under the bank's new governor, Hafize Gaye Erkan.
The rate had been 18% in September 2021 before being cut to 16% the next month.
According to an Anadolu Agency (AA) survey last week, economists expected a 500-basis-point interest rate hike, with the lowest estimate at 250 basis points and the highest at 650.
Economists see a hike of 500 basis points this Thursday to 20%, according to the median estimate of 23 economists in a Reuters poll, with forecasts ranging between 17% and 21.50%.
Bloomberg surveys see the benchmark one-week repo rate being lifted to 18.25%.
The rate hike and the hawkish tone were the strongest signals of a reversal after two years of loose policy under the government’s economic program that prioritized growth and investments.
Since winning reelection in May, President Recep Tayyip Erdoğan has signaled a return to conventional policies by appointing two internationally respected economists to key positions.
Former Merrill Lynch banker Mehmet Şimşek returned as finance minister, a post he held until 2018, while Erkan took over leadership of the central bank, the first woman in that position. She was previously co-chief executive of the now-failed San Francisco-based First Republic Bank.
Türkiye’s annual inflation has eased to 38.21% as of June, marking a significant regress from a 24-year high of 85.51% last October. However, it is expected to rise again after the government hiked taxes on a wide range of goods to support the budget.
The inflation surged amid a steep depreciation in the Turkish lira that came after the country opted for an easing drive that saw the central bank slash its key policy rate to 8.5% in February from 19% in 2021.