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Türkiye leaves policy rate unchanged despite raging inflation

Türkiye kept its key policy rate unchanged on Thursday following an aggressive rate hike cycle, despite calls from some economists for further tightening measures to tame raging inflation.

The central bank’s monetary policy committee (MPC) maintained its benchmark one-week repo rate at 45 percent, in line with market expectations, a statement said.

The MPC pointed out that “the current level of the policy rate will be maintained until there is a significant and sustained decline in the underlying trend of monthly inflation.”

The central bank expects inflation to rise from nearly 65 percent last month to 70-75 percent in May before dipping to about 36 percent by the end of this year as tightening measures cool prices.

But that figure would still be very high compared to other nations and will bring continued hardships for millions of households struggling to make ends meet, Senol Babuscu, professor of finance from Ankara’s Baskent University, told Xinhua.

“Inflation is still very high in Türkiye despite interest rate increases,” this analyst said, adding that he doesn’t anticipate a rate change until the summer.

Some analysts said that surging inflation due partially to significant wage and pension hikes decided by the government in January to address a cost-of-living crisis is putting pressure on the central bank to start again raising the interest rate.

“The central bank’s rationale was to fight inflation with interest rate hikes. However, the policy rate is still inferior to the consumer prices increase rate,” Istanbul-based economist Mustafa Sonmez told Xinhua.

He also expressed skepticism about the effectiveness of rate hikes in curbing inflation.

“Türkiye’s inflation-interest balance has deteriorated in the past three years. The interest rate needed to achieve a balance with previous years is now 65 percent,” Sonmez added.

Turkish Economic Policy Research Foundation, an Ankara-based think-tank, issued a note on Tuesday, calling on the central bank to hike the policy rate to 47.5 percent to ensure disinflation.

Inflation surged again in recent months as the Turkish lira weakened after a long easing cycle that has been reversed by the new economy administration appointed after the May 2023 general elections.

Since then, Türkiye reversed an ultra-loose monetary policy and delivered eight consecutive rate hikes in line with an orthodox economic strategy, bringing the policy rate to 45 percent from 8.5 percent, a move widely welcomed by foreign investors.

In January, following a 250 basis points increase, the bank said the tightening was enough to curb sky-high inflation.

Fatih Karahan, who was appointed as the new governor of the bank early this month following the resignation of Hafize Gaye Erkan, signaled that new hikes may be on the table, depending on the inflation outlook.

Stubborn inflation in Türkiye opened room for more interest-rate hikes, according to Deutsche Bank AG.

“Given our view of stickier inflation pressure in the near-term, we see room for another 250 basis points or even 500 basis points of front-loaded tightening,” the bank said in a note to investors on Feb. 4.

Other analysts have emphasized the need for a reduction in public expenditure to help alleviate inflation.

“To get rid of the inflation problem, it is not enough to just control the foreign currency and raise the policy interest rate. In addition, public expenditure must be reduced. It must slow down,” Emre Alkin, an economist at Istanbul’s Topkapi University, said in his weekly blog.

According to Alkin, payments to contractors for mega projects should be halted temporarily, and tax rates on essential goods and services should be lowered.

Famagusta Gazette