Central Bank (CBRT) governor Gaye Erkan and Co. delivered as widely expected by surveys, raising the policy rate by 250 basis points to 42.5%. The accompanying statement hinted that the current leg of monetary tightening is nearing its end, though in the longer term more might come. CBRT also tweaked macro-prudential rules briefly after the announcement of the rate hike, to soak up excess liquidity in the market and to liberalize the restrictions imposed on bank balance sheets during former governor Kavcioglu’s era.
The MPC stated that “Assessing that monetary tightness is significantly close to the level required to establish the disinflation course, the Committee reduced the pace of monetary tightening. The Committee anticipates to complete the tightening cycle as soon as possible”, which suggests that another 250 basis point hike is in the making in January meeting.
Then, CBRT will pause to assess the results of the tightening this far and outcome of the end—March local elections to set course for the rest of 2024.
However, monetary tightening by stealth is expected to continue through other CBRT tools, which in this case happens to be reverse repo auctions, the resumption of which was announced on the same day.
Senol Babuscu, a professor of finance from Ankara’s Baskent University, said the bank’s decision was anticipated.
“We may expect a final rate hike in January that would complete the tightening cycle,” he told Xinhua, adding that the policy rate would then likely remain unchanged for much of 2024.
The economist pointed out that monetary policy alone could not reduce inflation, at least not just by increasing interest rates, and emphasized the need for structural reforms to strengthen the Turkish economy.
Hakan Kara, a scholar at Ankara’s Bilkent University and former chief economist of the central bank, said that the final rate hike in January would close the tightening cycle intended to cool domestic demand and rein in stubborn inflation.
Following the rate hike in January, the policy rate will likely remain at this level until at least the third quarter of next year, Kara wrote in a post on social media platform X, formerly known as Twitter.
Last Hike?
“This will almost certainly not be the last rate rise in this cycle,” said Cagri Kutman, a London-based Turkish specialist at boutique bank KNG Securities. “There is much still to be done in taming inflation but the bond market is optimistic that Turkey is on the right track.”
Others, including Deutsche Bank AG and Morgan Stanley, differ, saying they the benchmark will probably be increased again to 45% in January. Bloomberg Economics’ Selva Bahar Baziki also sees the central bank only stopping after hiking again next month by 250 basis points.
A new year increase to the minimum wage could yet change the policy path envisaged by authorities, given the potential impact on inflation.
Morgan Stanley and Goldman Sachs Group Inc. suggest the central bank could keep the door open for higher rates if the minimum wage is hiked higher than expected. The two Wall Street banks see the lowest pay rising by about 40-50%.
“The size of the annual minimum-wage hike in January is especially important,” Goldman analysts including Basak Edizgil said in a note.
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