The Turkish Central Bank has kept its key interest rate unchanged for the eighth consecutive month, aiming to curb inflation rates that were higher than expected in September and October. The bank also indicated that a monetary easing cycle would likely begin soon, potentially as early as the upcoming December meeting. The Monetary Policy Committee left the one-week repo rate at 50% on Thursday, according to the Central Bank’s official website. This decision aligned with expectations, which had forecasted that borrowing costs would remain at this level in the latest meeting. The bank also signaled a shift toward monetary easing by 2025. Economists at Goldman Sachs and Morgan Stanley believe that the first signs of rate cuts will appear in January.
Annual inflation in Turkey slowed to 48.6% in October, but it was still higher than anticipated. While this was lower than the rate in September, the figure remains significantly high. The 19 economists participating in a Bloomberg survey had forecasted inflation between 47.90% and 48.50%. Despite the Central Bank’s commitment to high interest rates in the latest monetary policy meeting, Governor Şahap Kavcıoğlu adopted a different tone earlier last month, raising inflation expectations for this year and beyond. According to analysts at Deutsche Bank, led by Ankit Jain, these changes signaled a “slightly less hawkish monetary policy” from the Central Bank.
As foreign investors, who had sharply reduced their holdings in Turkish stocks since the mid-2000s, began to find new reasons to invest again, Erdoğan abandoned some of his unorthodox economic policies following his re-election in May 2023. Mehmet Şimşek, a former bond strategist at Merrill Lynch whom Erdoğan appointed as Minister of Finance in June of the same year, implemented a series of investor-friendly policies. The core of Şimşek’s program focused on dramatically raising borrowing costs, reversing a failed policy of keeping interest rates low. However, local savers are now drawn to the attractive interest rates available on lira-denominated bank deposits and money market funds. The annual interest rate on lira deposits for up to one year is around 53%, compared to 22% a year ago, according to Central Bank data. These rates are seen as favorable when compared to market participants’ expectations of year-end inflation at around 43%, although still below the 62% inflation rate recorded in July.
Inflation in Turkey slowed to 48.6% in October, down from 49.4% in September on a year-on-year basis, coming in higher than the expected 48.3%, according to official figures. Consumer price inflation in Turkey had fallen to 49.38% in September. According to the Turkish Statistical Institute, monthly inflation in September was 2.97%, significantly surpassing a Reuters survey estimate of 2.2%. In August, monthly inflation had been 2.47%, while the annual rate stood at 51.97%.
Many experts believe that the economic collapse in Turkey forced Erdoğan to make several concessions, particularly in his relationship with the opposition. Additionally, Erdoğan attempted to rebuild relations with Syria, partly to attract more Russian investment. It is clear that Russia has set conditions for supporting Erdoğan, including normalization with Syria and Bashar al-Assad’s regime in order to secure further investments, along with improving relations with Iran.
