Turkey's Central Bank Slows Pace of Interest-Rate Hikes, Signals Peak Is Near -- Update

By Ed Frankl

Turkey's central bank on Thursday raised its key interest rate for the seventh consecutive meeting, but slowed the pace of the rise, signaling that monetary tightness was close to the rate required to reduce inflation.

The central bank raised the country's benchmark interest rate, the one-week repo rate, to 42.5% from 40%, matching expectations from a consensus of economists polled by FactSet. The 0.25 percentage-point hike was less than the three previous increases, which were 0.5 percentage points each.

It came after Turkish inflation edged up in November to 62% from 61% in October, significantly higher than the bank's 5% medium-term target, having continued to rise through the summer.

However, recent indicators have also suggested that domestic demand continues to ease as monetary tightening impacts the economy more clearly, it added, repeating language from its previous meeting.

"The [monetary policy] committee anticipates to complete the tightening cycle as soon as possible," the bank said.

"Assessing that monetary tightness is significantly close to the level required to establish the disinflation course, the [monetary policy] committee reduced the pace of monetary tightening," the bank said.

The transmission of monetary policy was also helped by a notable improvement in external financing conditions, continued increases in foreign-exchange reserves and the acceleration in domestic and foreign demand for lira-denominated assets, it added.

Still, the commentary doesn't close the door on the tightening cycle, according to Nicholas Farr, emerging Europe economist at Capital Economics, who expects one final 250 basis-point hike in January.

"More importantly, policy makers will need to keep interest rates high for an extended period if they want to bring inflation down to single digits," he added.

The lira has fallen 36% against the U.S. dollar in the year to date, according to FactSet data.

Turkey's central bank has steadily raised rates since June in a return to more orthodox monetary policy under governor Hafize Gaye Erkan, a former executive at Goldman Sachs. It reversed a stance of maintaining lower rates favored by President Recep Tayyip Erdogan prior to his re-election earlier this year.

Write to Ed Frankl at [e-mail]

(END) Dow Jones Newswires

12-21-23 0657ET