Turkey holds interest rates

Turkey’s central bank held its policy rate flat at 50% today (May 23), despite warning of ongoing inflationary pressures.

Sticky services inflation, geopolitical factors and food prices “keep inflationary pressures alive”, the Central Bank of the Republic of Turkey (CBRT) said in a statement.

It added that policy will be tightened “in case a significant and persistent deterioration in inflation is foreseen”.

The current rate of 50% will be maintained “until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range”, the central bank said.

The CBRT reiterated its earlier forecast that disinflation will begin in the second half of the year. It expects inflation to peak in May.

The decision to keep the policy rate flat comes two weeks after the CBRT raised its forecast of inflation at the end of 2024 to 38%, from 36%. The central bank cited high services inflation, food prices and rents as the drivers of overall inflation in the country.

It said today that import of consumption goods went up in April, limiting the improvement in the current account balance.

According to official figures, inflation reached 69.8% in April, although independent estimates put it even higher.

The monetary policy committee will take into account the lagged effects of monetary tightening and make decisions to bring inflation down to 5% in the medium term, the CBRT said.

Alongside monetary policy, the CBRT plans to tighten macro-prudential policy. “Considering the recent developments in credit growth and deposits, additional steps will be taken to preserve the macrofinancial stability and to support the monetary transmission mechanism,” the central bank said.

It added that excess liquidity stemming from domestic and foreign demand for Turkish lira assets will be sterilised using extra measures.

The country’s president Recep Tayyip Erdoğan has sacked a series of central bank governors after they tightened monetary policy. He has repeatedly expressed his view that higher rates are associated with higher inflation.

Speaking to Central Banking earlier this month, Orkun Saka, associate professor of economics at City University of London, said “there is definitely indirect, implicit political pressure, given the many negative spillovers of raising interest rates in the short-term”.