Turkey central bank holds interest rates at 50%

Turkey’s central bank left interest rates on hold on Thursday at 50% as it said it was keeping a close eye on inflation.

The decision to stand pat came a month after the Central Bank of the Republic of Türkiye surprised markets by hiking its key rate to 50% from 45%.

The Bank said that despite an ongoing decline in March, the underlying trend of monthly inflation was higher than expected.

It said: "The monetary policy decisions in March have led to a significant tightening in financial conditions. The effects of monetary tightening on credit conditions and domestic demand are closely monitored. Considering the lagged effects of the monetary tightening, the Committee decided to keep the policy rate unchanged, but reiterated that it remains highly attentive to inflation risks. The tight monetary stance 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.

"Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen. The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations. Consequently, disinflation will be established in the second half of 2024."

Liam Peach, senior emerging markets economist at Capital Economics, said: "For now, the central bank appears to be sticking with its year-end inflation forecast of 36% y/y (down from 66% in March), even as the consensus forecast among analysts has risen to 44% since the start of the year.

"We feel it’s likely to take some unexpectedly strong inflation figures to prompt another hike in this cycle, but we maintain our view that rate cuts are some way off as the economy continues to run hot. While the consensus view is that easing will start in Q4, we still think the central bank will begin to cut rates next year."