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Turkey Gets Surprise Inflation Reprieve Ahead Of More Rate Hikes

Turkey has recently witnessed a surprise inflation. This has become a serious issue to tackle as this has also predominantly affected the hikes. As per the data the consumer prices rose 61.4% in October from last year. Turkey’s central bank has proceeded to hike interest rates by more than 25%. Mostly the economists had expected the bank to go up to 20% but the hike of 25% has shocked everyone. 

The central bank has stated that the recent indicators point to a continued increase in the underlying trend of inflation. They have also added onto the statement by mentioning that the monetary tightening will further be strengthened as much as needed but in a timely and a gradual manner until a significant improvement in the inflation outlook is achieved. They clearly said about how it is to anchor the inflation expectations and to control the deterioration in the pricing behaviour that is being witnessed. 

The inflation has clearly been falling since peaking at 85% in the month of October 2022 but jumped from 38% in June this year to 48% in July. The policy makers have expected the inflation to end this year at 65% and peak next may as high as 75%. Though as per Erkan mentioned that higher interest rates will be the centrepiece of her efforts to turn things completely around and change. Other policymakers, including the finance minister Mehmet Simsek, have commented that investors should focus on deposit rates relative to projected inflation. 

The central bank has increased the borrowing cost ever since the president Recep Tayyip Erdogan was re-elected in may. The bank’s monetary policy committee will increase the benchmark rate by 500 basis points . 

The conflict that has erupted between Israel and Hamas has worsened the inflationary situation in Turkey as it is a major energy importer. The central bank has simplified the rate caps on loans and exempted the import of investment goods from the net exporter requirement along with the objectives of providing companies access to export the loans. The bank has also made further adjustments in the required reserve in order to mop up liquidity in the whole banking system. So far it is expected the loss of momentum to continue over the coming period given tighter financial conditions which are more supportive of normalising of household consumption. The governor is taking the required steps so far and has cited a stronger demand for the lira as well.





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