Turkey pledges to keep tightening until inflation outlook improves

By Orhan Coskun, Ezgi Erkoyun and Huseyin Hayatsever

ANKARA (Reuters) – Turkey will continue its monetary policy U-turn, which began with a sharp post-election rate hike last month, until the inflation outlook improves significantly, the central bank said on Monday.

The hawkish policy guidance came as data showed the central bank’s net foreign reserves recorded their biggest weekly leap on record as the bank eased off interventions in the currency market to stabilise the lira.

Just over a month after President Tayyip Erdogan won re-election in a tight contest, the country is embracing a more conventional economic policy after years in which interest rates were slashed despite soaring inflation.

“The monetary tightening process is expected to continue until a significant improvement is achieved in the inflation outlook,” the central bank said in minutes of its June monetary policy committee meeting at which it hiked its main interest rate by 650 basis points to 15%.

The bank said the U-turn after a two-year easing cycle was the first step of a process to curb inflation. Annual inflation was near 40% in May after touching a 24-year high above 85% in October last year.

The rate hike came in the first policy meeting under new Central Bank Governor Hafize Gaye Erkan.

Before that, the one-week repo rate had dropped to 8.5% from 19% since 2021, and the bank had used foreign exchange reserves to prop up the lira, which nonetheless plunged to a series of record lows.

The central bank’s net reserves rose to $9.19 billion in the week to June 23, its biggest rise on record. Reserves fell to $-5.7 billion in the week to June 2, their lowest since the data began being published in 2002.

Although the central bank’s reserves have rebounded since mid-June, state banks are still selling dollars to meet demand from maturing lira deposit accounts known as KKM.

A senior economy official told Reuters that the state banks sold some $1 billion on Monday to meet FX demand from the maturing accounts, which the state guarantees against depreciation losses.

The sales aimed to provide liquidity and did not constitute intervention in the exchange rate, the official said. Authorities were not seeking to support the lira and the central bank maintained its stance of not selling via state banks, the person added, requesting anonymity.

Erdogan’s government introduced the KKM scheme in late 2021 to stem a historic currency crash that was largely brought on by his economic programme of cutting rates to stoke growth, exports and investment.

But under new bank chief Erkan, whom Erdogan named last month in the face of a worsening economic outlook, that programme is being reevaluated, the minutes suggested.

“The committee evaluated that the current monetary policy framework is far from achieving the 5% inflation target, given the inflation outlook and upside risks,” the central bank said.

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