Turkey raises rates to 45% but signals end to monetary tightening

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Turkey has increased interest rates to 45 per cent as policymakers signalled that a eight-month campaign of big rises in borrowing costs was over, with the country’s prolonged inflation crisis expected to ease this year.

The central bank on Thursday boosted its benchmark one-week repo rate by 2.5 percentage points, in line with expectations and marking the eighth increase in borrowing costs since June.

The central bank’s policy-setting committee said that although inflation remained at nearly 65 per cent and might rise further in the coming months, “recent indicators suggest that domestic demand continues to moderate in line with the projected disinflation process as monetary tightening is reflected in financial conditions”.

It added: “Taking into account the lagged impact of monetary tightening, the committee assesses that the monetary tightness required to establish the disinflation course is achieved and that this level will be maintained as long as needed.”

The move by the central bank is the latest sign of how Turkish President Recep Tayyip Erdoğan, who once called high interest rates the “mother and father of all evil”, has undertaken an abrupt shift towards more conventional economic policies following his re-election in May.

The central bank, helmed by former Goldman Sachs banker Hafize Gaye Erkan, said inflation could rise above 70 per cent by summer, but would then cool rapidly to 36 per cent by year-end.

Goldman Sachs said this month it expected inflation to ease this year more rapidly than the central bank expected. The Wall Street bank said in a note to clients that it expected inflation to fall to 33 per cent by the end of 2024.

Turkey has also launched a wide-ranging programme of economic reforms aimed at rebuilding the central bank’s foreign currency war chest and cooling rampant consumer demand that had…