Turkey’s Central Bank Increases Interest Rate to 46%

By Nevzat Devranoglu and Daren Butler

ISTANBUL (Reuters) – Turkey’s central bank has raised its key interest rate by 350 basis points to 46%, surprising many and reversing an easing cycle. This move is aimed at stabilizing the lira and addressing rising inflation following market turmoil linked to the recent arrest of Istanbul’s mayor, Ekrem Imamoglu.

The central bank’s pivot comes just four months after it began cutting rates, amid pressure on the lira that forced it to use its foreign currency reserves. Last month, the lira had briefly hit a record low of 42 against the U.S. dollar, alongside significant declines in stocks and bonds due to Imamoglu’s detention.

The bank indicated that “recent developments in financial markets” may slightly raise monthly core goods inflation in April, as domestic demand exceeds expectations, suggesting a weaker disinflationary effect. Additionally, the central bank’s committee noted that inflation expectations and pricing behaviors present risks to the disinflation process, warning that further tightening may be necessary if significant inflation deterioration is anticipated.

After an aggressive tightening that started in mid-2023, the bank began easing in December when rates were at 50%. A Reuters poll revealed that only three out of 13 economists anticipated such a large hike, while others expected a pause.

Following the rate announcement, the lira slightly strengthened to 38.07 against the dollar, though Turkish stock indices saw mixed results. This decision aligns with global market disturbances stemming from increasing trade tensions between the U.S. and China.

Economists predict that the recent lira weakening, attributed mainly to Imamoglu’s arrest, may elevate inflation in April and May. March annual inflation had eased to 38.1%, with the central bank projecting a drop to 24% by year-end.

Imamoglu, a significant rival to President Tayyip Erdogan, is currently imprisoned pending trial. His arrest has triggered substantial protests and raised critiques regarding judicial independence and rule of law, which the government contests.

Experts, like Erik Meyersson from SEB, suggest that market skepticism will persist amid the ongoing suppression of Turkey’s political opposition, anticipating rate cuts to resume in June, targeting a rate of 32% by year-end.

Since Imamoglu’s detention, the central bank reportedly sold about $50 billion in reserves and acquired approximately 120 billion lira ($3.15 billion) in bonds, helping to stabilize the lira around 38 against the dollar and slightly recover Turkish assets. The bank also resumed one-week repo auctions while closely monitoring liquidity conditions.

> ($1 = 38.1429 liras)