The Turkish Central Bank announced the imminent end of the monetary tightening cycle

The Turkish Central Bank announced the imminent end of the monetary tightening cycle announced in June 2022. During this time, the rate was increased six times – from 8.5% to 40%. This made it possible to slow down the weakening of the national currency – the lira, as well as reduce the monthly rate of inflation growth – in annual terms its level, however, still exceeds 60%. The regulator, however, records a decline in inflation expectations and a cooling of domestic demand, although it points to the persistence of external risks.

The Central Bank of Turkey following the November meeting raised rate by another 5 percentage points, to 40%. This is the sixth increase in a row – in June, against the backdrop of a sharp weakening of the lira after the presidential elections, the regulator announced the beginning of tightening monetary policy (at that time the rate was 8.5%). As a result, the current rate level has become the highest since mid-2003. In a statement following the meeting, the regulator indicated that in the future the pace of tightening monetary policy (MP) will slow down, since the rate level is already “largely consistent with the level that is necessary to set a course to reduce inflation”, and the cycle will end “in within a short time.” At the same time, the National Bank will continue to adhere to a more stringent policy to maintain macro-financial stability (including to ensure the inflow of funds into deposits).

The Central Bank of Turkey notes signs of improving inflation expectations, as well as a cooling of domestic demand due to tightening lending conditions amid rising rates (this primarily affected consumer lending).

Separately, the regulator points to the stabilization of the lira exchange rate – this was facilitated by an improvement in the current account of the balance of payments (in September a surplus of $1.88 billion was recorded, including the trade deficit decreased to $5 billion), an increase in demand for assets denominated in lira, and an increase in reserves. Note, however, that the lira/dollar exchange rate continues to weaken (currently 28.8 lira per $1), but much slower than before the announcement of the policy tightening policy.

In annual terms, inflation remains high – in October the figure was 61.36% versus 61.53% in September. Monthly dynamics, however, confirm the trend towards a slowdown in price growth – in October they increased by 3.43% against 4.75% a month earlier (in July-August prices grew by more than 9% amid a surge in the tourism sector).

Nevertheless, the high level of demand, persistent inflation in services and geopolitical risks continue to put pressure on price growth, the Central Bank notes.

The current cycle of rate increases actually confirmed the need to tighten policy to combat inflation and the weakening of the national currency. Before this, the Turkish authorities tried to implement the opposite concept – a “new economic model”, which involves reducing rates to reduce the cost of lending (this model allows stimulating the growth of capital investments, but depreciates income population). The discrepancy between the level of rates and inflation in Turkey began in the fall of 2021 – then inflation reached 20%, and the level of rates, on the contrary, began to decline (in 2021 – from 19% to 14%, in 2022 – to 9%, in 2023 -m – up to 8.5%).

The new course was announced after shifts the Cabinet of Ministers and the head of the Central Bank – one of the key posts, the head of the Ministry of Finance, was given to an economist with experience in investment banks and a supporter of moderate fiscal policy, Mehmet Şimşek, who held this position in 2009–2015, while Hafize Gaye Erkan was appointed to the post of head of the Central Bank, previously worked primarily in American banks, including Goldman Sachs.

Tatiana Edovina