The Turkish central bank hiked its key interest rate by 350 basis points to 46% on Thursday, in a surprise move that reversed an easing cycle and slightly boosted the lira, following last month’s brief market volatility and global uncertainties, while warning of a rise in monthly core goods inflation in April.
The Central Bank of the Republic of Türkiye (CBRT) also again lifted its overnight lending rate to 49% from 46%, after having already raised it last month in an unscheduled policy decision. Moreover, it raised the overnight borrowing rate from 41% to 44.5%.
The central bank had begun easing in December, when the rate was 50%, after an aggressive tightening effort since mid-2023 to bring down elevated prices.
Annual inflation in Türkiye eased to 38.1% in March from around 75% last May, amid continued disinflation in the face of tighter monetary policy.
“The underlying trend of inflation declined in March. Monthly core goods inflation is expected to rise slightly in April due to recent developments in financial markets, while services inflation is likely to remain relatively flat,” the bank said following its monetary policy meeting (MPC).
“Leading indicators point to a level of domestic demand above projections despite some loss of momentum in the first quarter, suggesting a lower disinflationary impact,” it added.
Risks to disinflation
Moreover, the monetary authority also warned of the potential impacts of rising protectionism, without direct reference to tariffs imposed by U.S. President Donald Trump, while warning that inflation expectations and pricing behavior continue to pose risks to disinflation.
“Potential effects of the rising protectionism in global trade on the disinflation process through global economic activity, commodity prices and capital flows are closely monitored. Inflation expectations and pricing behavior continue to pose risks to the disinflation process,” the statement read.
The committee, led by Governor Fatih Karahan, did not exclude further tightening and said that tight monetary policy would remain in place until price stability is achieved through a sustained reduction in inflation.
At the same time, it said, “The decisiveness regarding tight monetary stance is strengthening the disinflation process through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations.”
“The tight monetary stance will be maintained until price stability is achieved via a sustained decline in inflation. Accordingly, the policy rate will be determined in a way to ensure the tightness required by the projected disinflation path, taking into account realized and expected inflation, and the underlying trend,” it said.
The bank stressed that it would make cautious decisions on a meeting-by-meeting basis, with a primary focus on the inflation outlook.
“The monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen,” it vowed.
Economists’ expectations varied ahead of the decision, with market forecasts largely anticipating that the rate would be left unchanged.
Last month, the Turkish lira briefly hit a record low of 42 to the U.S. dollar and stocks plunged after the detention of Istanbul Mayor Ekrem Imamoglu on graft charges, but have since recovered. The lira steadied near 38 to the dollar. On Thursday afternoon at 2:40 p.m. local time (12:40 p.m. GMT), it quoted at 38.10 versus as low as 38.17 earlier during the day.
In a Reuters poll, 10 of 13 respondents forecast the bank would maintain its one-week repo rate while three predicted a hike of up to 350 basis points. Most respondents expected the overnight lending rate would be held at 46%.
The rate decision came amid global market turmoil caused by what has become an all-out trade war between the United States and China, with both sides ratcheting up their import tariffs.
Separately, the CBRT also announced later on Thursday it had decided to resume the one-week repo auctions that were suspended via a press release on March 20, 2025.
“In line with the price stability and financial stability objectives, the CBRT will continue to closely monitor liquidity conditions and use liquidity management tools effectively,” it said.
