Turkey lifts rates for second consecutive month

Receive free Turkish economy updates

We’ll send you a myFT Daily Digest email rounding up the latest Turkish economy news every morning.

Turkey’s central bank has boosted borrowing costs for the second time in as many months, but the limited scale of the increase prompted concerns that policymakers are prioritising growth over fighting inflation.

Policymakers raised the one-week repo rate by 2.5 percentage points to 17.5 per cent. Local businesses were anticipating an increase to 20 per cent, according to a poll by the central bank before Thursday’s decision.

The interest rate rise marks the latest sign of how Turkey is overhauling its economic policies after President Recep Tayyip Erdoğan was re-elected in May. New finance minister Mehmet Şimşek has vowed to restore “rational” policies after years of unorthodox measures pursued by Erdoğan, including an insistence on keeping rates low, fuelled runaway inflation and a huge trade deficit.

Hafize Gaye Erkan, a former Wall Street banker, was tapped in June to lead the central bank. She soon increased rates from 8.5 per cent to 15 per cent and on Thursday said that in addition to rate rises, the central bank had also “made decisions on quantitative tightening and selective credit tightening to support the monetary policy stance”.

Thursday’s rate rise was broadly seen as a step in the right direction, but several analysts said they were concerned that policymakers were moving too slowly, given that inflation is running at almost 40 per cent. There are also worries that Erdoğan, a life-long opponent of high interest rates, will intervene ahead of important local elections early next year.

“It’s too early to slow the pace of tightening as they’ve done,” said Liam Peach at Capital Economics in London. “There’s still a huge gap between where rates are and where inflation is — it rings alarm bells.”

Fatih Akcelik, an analyst at JPMorgan, said it appeared the central bank was aiming for a “gradual tightening to avoid a recession ahead of the March 2024 local government elections”. The Wall Street bank now expects Turkey’s economy to grow 4 per cent this year, compared with its previous 3.2 per cent forecast.

Turkey has taken a series of other steps in recent weeks aimed at cooling domestic demand and re-refilling government coffers that have been depleted by huge pre-election giveaways and an effort to rebuild the vast area of the country’s south that was ravaged by February’s earthquake. The government recently tripled petrol taxes following an increase in value added taxes on a broad swath of goods and services.

Ankara has also backed away from its defence of the lira, which depleted Turkey’s foreign currency reserves. The currency has tumbled more than a fifth against the dollar since the start of June to a record low of TL27 as a result.

Economists say that the weak lira, which makes imports more expensive, and the tax rises will trigger a fresh bout of inflation. Local business executives expect inflation to rise from about 38 per cent in June to 45 per cent by the end of this year, according to the central bank poll. Bank of America said this week it expects inflation to reach 65 per cent by May 2024.

Still, there are early indications that the new policies are beginning to bear fruit. Turkey’s foreign currency reserves have jumped $15.5bn since the end of May, while foreign investors, who have largely abandoned Turkish financial assets in recent years, have pumped $1.5bn into the equity market in the six weeks to July 14.

Saudi Arabia and the United Arab Emirates also this week pledged to make fresh investments in Turkey as Erdoğan embarked on a tour of the Gulf region. ADQ, one of Abu Dhabi’s state investment funds, also said it would provide up to $8.5bn through bonds to support reconstruction efforts after the earthquake.