Turkey raises interest rates for fifth time in as many months

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Turkey has raised interest rates for the fifth time since June as the country steps up its battle against inflation and the threat of escalating conflict in the Middle East poses a fresh challenge to policymakers.

The central bank on Thursday increased the benchmark one-week repo rate by 5 percentage points to 35 per cent, matching the expectation of economists in a Reuters poll.

The big rate rise is the latest sign of how Turkey has sharply pivoted its economic policy since President Recep Tayyip Erdoğan was re-elected in May. Central bank chief Hafize Gaye Erkan has vowed since her appointment in June to tighten monetary policy as much as is necessary to cool inflation, which is running at more than 60 per cent. 

“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in inflation outlook is achieved,” the central bank said, as it warned that “geopolitical developments pose risks to the inflation outlook” if they led to higher oil prices.

The price of international crude benchmark Brent has jumped nearly 20 per cent to $88 a barrel since the start of June. Production and export cuts by Saudi Arabia and Russia have partly driven the rally. But analysts also fear that any broadening of the Israel-Hamas war into a wider regional conflict will send prices even higher. 

Turkey imports the bulk of its energy and, in addition to boosting inflation, higher oil prices will make it more difficult for the government to achieve its goal of narrowing the country’s massive current account deficit. 

“The central bank’s policy tightening and its recent communications have helped to rebuild its credibility and generate confidence that it is taking a more serious stance against inflation,” said Liam Peach, senior emerging markets economist analyst at Capital Economics.

Erkan’s central bank has more than quadrupled the one-week repo rate since June in an attempt to rein in inflation, which has been fuelled both by overheating domestic demand and elevated energy prices.

The higher-rate policy marks a stark contrast to Erdoğan’s long-held insistence that borrowing costs should be kept at low levels despite a prolonged period of high inflation.

Erdoğan in September publicly embraced tight monetary policy, something that has helped to ease scepticism that the Turkish president will change course ahead of next year’s local elections in which his Justice and Development party will attempt to take back control of the country’s biggest city, Istanbul. 

A central bank poll before Thursday’s rate decision showed Turkish investors and business leaders expected the one-week repo rate to be 39 per cent a year from now, highlighting how the local business community is braced for a long period of high borrowing costs. 

Higher rates are part of a broader economic overhaul that is being led by finance minister Mehmet Şimşek, who was appointed in June. The government has boosted taxes, taken a series of actions to slow consumer and commercial lending growth and allowed the lira to fluctuate more freely after curtailing a costly programme to prop it up. 

Foreign investors, who fled Turkey after years of unorthodox economic policies, have broadly taken an upbeat view on the new programme even if they remain sceptical about how much leeway policymakers will have ahead of next year’s municipal elections. 

Investors are also paying keen attention to Erdoğan’s response to the Israel-Hamas conflict. The Turkish president has stepped up his rhetoric against the Jewish state and its western allies in recent days. Turkish stocks fell sharply on Wednesday after he said Hamas, whose militants killed at least 1,400 people in its October 7 attack on Israel, was not a terrorist organisation but rather a “group for liberation”.

Helping to counterbalance those concerns was Erdoğan’s decision this week to send Sweden’s request for accession to Nato to Turkey’s parliament. The US and Europe have both been pushing Ankara to ratify Sweden’s accession into the military alliance.