Türkiye delivers 650-basis point hike to 15% but still underwhelms

Türkiye’s central bank hiked its key rate by 650 basis points to 15 per cent on Thursday and said it would go further in a reversal of President Recep Tayyip Erdogan’s policy, although the post-election tightening missed expectations and the lira fell.

In its first meeting under new Governor Hafize Gaye Erkan, the bank changed course after years of monetary easing in which the one-week repo rate had dropped to 8.5 per cent from 19 per cent in 2021 despite soaring inflation.

Analysts said the move suggested Erkan might have limited room to aggressively tackle inflation under Erdogan’s watch. The median estimate in a Reuters poll was for rates to rise to 21 per cent.

Thirty minutes after the hike — Türkiye's first since early 2021 — the lira suddenly began to tumble, touching an all-time low beyond 24.60 versus the dollar. The central bank’s policy committee said the tightening 

“will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved”.

Striking a more hawkish tone than a month earlier, it said it raised rates “in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behaviour.” Annual inflation was just below 40 per cent in May after touching a 24-year high above 85 per cent in October last year. The central bank said inflation will come under further pressure.

It added it will gradually “simplify and improve the existing micro- and macroprudential framework” to improve market mechanisms and stability — suggesting some of the dozens of regulations adopted since late 2021 could be rolled back, freeing up credit, forex and debt markets.