ISTANBUL (AP) – The Turkish central bank increased its primary interest rate by 3.5 percentage points on Thursday, ending a 3-month easing streak. Struggling with persistent inflation and financial instability, this follows the arrest of the Mayor of Istanbul and the repercussions of global tariffs.
The Monetary Policy Committee has elevated the benchmark weekly repo rate from 42.5% to 46%, raising the overnight lending and borrowing rates to 49% and 44.5%, respectively.
The committee stated that “a stringent monetary policy will remain in effect until inflation sees a consistent decrease and price stability is reached.”
“The main inflation trend in March showed a decline,” the committee noted, but cautioned that core product inflation may see a slight rise in April “due to developments in financial markets,” while inflation in services is expected to remain stable.
Additionally, they mentioned that the growth of protectionism in global trade could jeopardize Turkey’s economic recovery by impacting commodity prices and capital flows due to the aftermath of global retaliatory tariffs.
Financial market analyst Iris Cibre lauded the decision as “very positive” for the bank’s credibility, which has faced criticism in the past for the perceived influence of political intervention on its decisions.
“There have been assertions that political interference is not allowed. The central bank has refuted these claims, enhancing the bank’s credibility,” she remarked.
Cibre indicated that the rate hike demonstrated that policymakers can operate “freely and politically,” despite Turkish President Recep Tayyip Erdogan’s longstanding preference for lower borrowing costs. “It is well-known that political pressure favors lower interest rates,” she said, warning of additional financial risks stemming from limited credit availability.
“There’s a 2% limit on credit growth, which continues to pose significant challenges for businesses. This could lead to heightened unemployment and a slower economic pace than anticipated.”
Cibre pointed out that US Federal Reserve officials are poised to assess the full effects of the newly announced retaliatory tariffs between the US and other nations before adjusting interest rates. “This is precisely what our central bank is emphasizing,” she added.
Turkey’s soaring inflation is attributed to a mix of factors, including rising energy costs, the economic repercussions of the Covid-19 pandemic, and Erdogan’s previous unconventional economic strategies that prioritized lowering interest rates even amid rising inflation.
Erdogan has consistently maintained that high-interest rates lead to inflation, a view that contradicts traditional economic theories.
In 2023, Erdogan appointed a fresh economic team, marking a departure from prior unconventional policies. The team commenced a series of interest rate hikes aimed at curbing inflation. After keeping interest rates steady at 50% for several months, the bank has initiated a gradual phase of rate reductions until now.
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This article corrects the credit growth limit mentioned by Cibre to 2%.
Source: apnews.com