News Analysis: Türkiye keeps key policy rate unchanged amid soaring inflation

by Burak Akinci
ANKARA, April 25 (Xinhua) — Türkiye’s central bank on Thursday kept its key policy rate unchanged at 50 percent as the country’s consumer prices soar, and experts have expressed concern that the official year-end inflation target may not be achieved.
“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 bank said in a statement after the monthly meeting of its rate-setting monetary policy committee.
The bank also emphasized the possibility of implementing further tightening measures “in case of a significant and persistent deterioration in inflation.”
In a surprise move, the bank raised its benchmark policy rate by 500 basis points in March after a pause in February that followed an eight-month tightening cycle to curb stubbornly high inflation.
The bank explained its decision in March was attributed to a “deterioration in the inflation outlook.”
Türkiye abandoned years of easing policies after last year’s general elections won by President Recep Tayyip Erdogan and his ruling coalition. It delivered aggressive tightening aimed at cooling demand to curb inflation.
The central bank has raised its key one-week repo rate from 8.5 percent to 50 percent since June 2023.
Despite the successive rate hikes, annual inflation climbed to 68.5 percent in March. It is projected to peak at 75 percent in the coming months before entering what government officials expect to be a steep downward trend in the second half of 2024.
Although the official year-end inflation target is set at 36 percent, many economists expect it to be higher, at around 45 percent.
“This target is unlikely to be met under the current conditions. We should expect a rate between 40 and 45 percent,” said Senol Babuscu, a professor of finance from Ankara’s Baskent University.
Citizens have yet to feel the effects of monetary tightening in their daily lives, Babuscu said, pointing out that they continue to grapple with the strain of rising living costs.
Atilla Yesilada, an Istanbul-based economist, told Xinhua that to fight sticky and stubbornly high inflation, the central bank should push rates to over 60 percent in the short term.
In addition, the expert emphasized the necessity of reducing public spending and trimming the national budget to alleviate inflationary pressures, which he expects to drop to around 45 percent by the end of the year.
“All of us will have to swallow the bitter bill, there is no other solution,” he stressed, predicting belt-tightening measures by the government such as higher taxes, which will translate into further economic hardships for Turks.
Yesilada argued that it has been nearly a year since Türkiye returned to a more conventional monetary policy and that it is time for structural economic reforms.
Annual food inflation stands at around 70 percent in Türkiye, as households are struggling with regular price hikes for necessities, particularly the low-income groups who have seen their purchasing power decline considerably.
However, the government has reassured citizens that economic conditions will improve.
Last week, Türkiye’s Vice President Cevdet Yilmaz said he expected inflation to fall to around 20 percent in the summer months as part of the government’s disinflation process.
“We will see a significant decline, especially during the summer months, June, July, August, when considering seasonal effects, the impact of our policies and base effects,” he told the private broadcaster A Haber on April 19.
Turkish Treasury and Finance Minister Mehmet Simsek held meetings in New York last week with international organizations such as the World Bank and the European Investment Bank, as well as with investors.
“We are strengthening the macroeconomic foundations with disinflation, structural reforms, and fiscal discipline, which is attracting considerable attention” from investors, he told the semi-official Anadolu Agency. Enditem