By Joshua Kirby
Turkey's central bank unexpectedly lifted its benchmark interest rate as it struggles to rein in rampant price inflation and alleviate a worsening currency crisis in the Middle Eastern nation.
The bank decided at its policy meeting Thursday to raise the one-week repo rate by five percentage points to 50.00% and said it would lift rates further in case of "significant and persistent deterioration in inflation."
Economists had expected the bank to keep the rate where it was, according to a poll compiled by FactSet.
The rate hike stands in stark contrast to the monetary easing that some other central banks have begun to enact as inflation cools to manageable levels. The Czech and Brazilian central banks cut their key rates this week, followed closely by the Swiss National Bank, the first among wealthy developed nations as a postpandemic surge in inflation draws to an end.
Turkish consumer prices, by contrast, continue to surge dramatically. Inflation picked up pace again last month to 67%, fueled by consumer demand, especially in the services sector. The central bank currently forecasts inflation to drop to 36% by the end of the year and to 14% a year later, but economists suggest these targets may prove elusive.
"Disinflation will be established in the second half of 2024," the bank said, pointing to an anticipated slowdown in domestic demand and appreciation in the lira.
The central bank had at the start of the year indicated that its major hiking cycle, begun the previous summer, was at an end, a stance that didn't change even when Governor Hafize Gaye Erkan in February stood down abruptly after less than a year at the helm. Her successor, Fatih Karahan, signaled he would favor the same course of keeping rates on hold until inflation began to cool sustainably.
The decision to lift rates again demonstrates that Turkey's economic headaches are far from being cured by last year's hiking cycle, said Bartosz Sawicki, market analyst at fintech firm Conotoxia.
"The vicious circle of long-known vulnerabilities seems to be gaining momentum yet again," he said, noting pressure on the Turkish lira and weakening capital inflows alongside dizzying rates of inflation. The lira, which stood at TRY7.61 against the U.S. dollar three years ago, on Thursday stood at TRY32.39 a dollar.
"Our forecasts assume no respite for the Turkish currency in sight," Sawicki said in a note.
The rate increase may however not fire the gun on a renewed lengthy cycle of policy tightening, said Liam Peach, emerging-markets economist at Capital Economics, in a note. That said, the central bank may well choose to lift rates once more next month by at least 250 basis points, especially if March inflation figures prove stubbornly high, Peach said.
Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby
(END) Dow Jones Newswires
03-21-24 0812ET
