People shop at a market in Ankara, Türkiye, on March 21, 2024. In a move that surprised the market, Türkiye's central bank raised its key interest rate by 5 percentage points on Thursday, reversing a one-month pause and responding to calls for stronger action to fight soaring inflation. (Photo by Mustafa Kaya/Xinhua)
by Burak Akinci
ANKARA, March 21 (Xinhua) -- In a move that surprised the market, Türkiye's central bank raised its key interest rate by 5 percentage points on Thursday, reversing a one-month pause and responding to calls for stronger action to fight soaring inflation.
The bank raised its one-week repo rate to 50 percent from 45 percent, citing the need to counter rising prices. The move surprised analysts who had expected the rate to be held steady until the nationwide local elections, which are scheduled for March 31.
"In response to the deterioration in the inflation outlook, the Monetary Policy Committee decided to raise the policy rate," the bank said in a statement.
In February, the central bank paused its tightening cycle and kept the key interest rate unchanged at 45 percent after eight consecutive monthly increases.
However, inflation in Türkiye climbed to a 15-month high of 67.07 percent in February and is expected to peak by mid-year before declining, according to official forecasts. The high inflation rate has hammered the Turkish lira, causing it to fall to a rate exceeding 32 liras to the U.S. dollar.
Economists welcomed the rate hike but said it could have been implemented sooner. They also expressed concern about the central bank's dwindling foreign exchange reserves, used to support the lira.
"More significant rate hikes should have been made to slow such a high rate of inflation," said Senol Babuscu, a professor of finance at Ankara's Baskent University.
Others pointed to the challenges of balancing inflation control with economic growth. The high borrowing costs associated with rate hikes can dampen economic activity.
Independent economist Arda Tunca questioned the effectiveness of the central bank's recent measures, such as new lending rules and credit card spending restrictions, in curbing inflation.
"People are increasingly turning to hard currencies for savings, and the central bank's interventions are struggling to stabilize the lira," Tunca said.
The central bank's financial tightening cycle comes after Turkish President Recep Tayyip Erdogan appointed a new economic team last June that reversed his previous unorthodox economic policies. Erdogan had long opposed high-interest rates, but economic pressures forced a shift in strategy.
Despite recent wage and pension increases, many Turks are struggling to afford necessities. The central bank's survey shows year-end inflation is expected to be much higher than its official forecast.
"Reducing inflation is not something that will happen overnight," Erdogan said recently, urging patience from the public. ■
A bakery worker works in Ankara, Türkiye, on March 21, 2024. In a move that surprised the market, Türkiye's central bank raised its key interest rate by 5 percentage points on Thursday, reversing a one-month pause and responding to calls for stronger action to fight soaring inflation. (Photo by Mustafa Kaya/Xinhua)
