Turkey shifts stance on rates

Turkey has leapfrogged Iceland as the European state with the highest interest rate after the country's central bank backed a 50 basis-point hike on Thursday.
Turkey has leapfrogged Iceland as the European state with the highest interest rate after the country's central bank backed a 50 basis-point hike on Thursday.

The central bank raised its benchmark overnight borrowing rate from 15.25% to 15.75%. The overnight lending rate also rose by half a point to 19.75%.

The hike follows 225 basis points-worth of cuts between March and September last year. The central bank decided to reverse the trend and raise rates for the first time since July 2006 on the back of burgeoning inflation.

"The lagged pass-through impact of the exchange-rate movements and rising energy and processed food prices may lead to a temporary rise in inflation in the short term," the central bank said.

However, it added that aggregate demand conditions would continue to support disinflation overall. "The committee expects inflation to start decelerating in the last quarter of the year, ending 2009 at around 6.7%, as forecasted in the April Inflation Report," the central bank said.

The central bank indicated that it would tighten policy further if inflation expectations rose, saying that it would "continue to take the necessary measures to prevent the potential second-round effects of the adverse developments in food and energy prices."

"The committee will consider the possibility of a further measured rate hike in the next meeting," the central bank said.

The minutes of Thursday's meeting will be published within eight working days.

Click here to read the central bank's statement

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