Turkey: Central Bank unexpectedly increases rates in April
TCMB unexpectedly tightens in April: On 17 April, the Central Bank of the Republic of Turkey (TCMB) decided to tighten monetary policy, surprising the market, which had expected a pause. The TCMB raised the repo rate on 1-week auctions—having suspended them at the 20 March emergency meeting—from 42.50% to 46.00%. The Bank also hiked the overnight borrowing rate from 41.00% to 44.50%, while raising the overnight lending rate from 46.00% to 49.00%.
Central Bank seeks to calm market jitters: The decision to hike the 1-week repo rate aimed to reassure markets that the Bank will commit to orthodox policies, thus defending the lira and alleviating potential pressure on the Bank’s foreign reserves. Regarding inflation, the TCMB stated that core goods inflation is expected to rise slightly in April. Meanwhile, the Bank now sees domestic demand above past projections despite losing some momentum in the first quarter, suggesting a lower disinflationary impact than expected and a need to tighten monetary policy.
TCMB to resume monetary policy easing: The Central Bank’s forward guidance remained hawkish, reiterating that it will tighten its monetary policy stance if “a significant and persistent deterioration in inflation is foreseen”. Following the Bank’s recent tightening and hawkish remarks, our panelists have revised their projections upward. Nonetheless, for the time being, they still expect sizeable rate cuts this year, and see a terminal 2025 rate of around 34.00%, slightly above January’s 29.00% but below the current 46.00%. The Bank will reconvene on 19 June.
Panelist insight: Clemens Grade and Basak Edizgil, analysts at Goldman Sachs, commented:
“We think the TCMB remains data-dependent but today’s decision should in our view reassure investors and reduce volatility going forward. Unless there are new shocks, we think the TCMB will restart its cutting cycle in July when we think annual inflation will have fallen to the low 30s, providing a sufficient real rate buffer, and with the external side being well-supported by the current account. We currently forecast the repo rate to fall to 33.00% by year-end, versus our previous forecast of 28.50% before 19 March, allowing for a sizeable additional risk premium.”
Meanwhile, analysts at the EIU said:
“We expect the central bank to cut interest rates again in the second half of 2025, provided that pressure on the lira now eases and the improvement in inflation data and inflationary expectations resumes after a likely interruption in April. However, the stability of the lira will depend partly on politics. In any case, the bank is likely to retain its option of funding the banks at up to three points above the policy rate in case of emergency.”