San Francisco Frontiers - Turkey's central bank delivers smaller rate hike

The bank lifted its policy rate by 2.5-percentage-points to 42.5 percent. This compares to five-point hikes in previous months.

The bank suggested that the rate hikes would start to slow and the tightening cycle would be completed "as soon as possible."

"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 in a statement.

"The monetary tightness will be maintained as long as needed to ensure sustained price stability," it added.

Turkey's interest rates are now the highest of President Recep Tayyip Erdogan's two decades in power.

A self-declared enemy of high interest rates, Erdogan made a U-turn after securing election victory in May.

He appointed a new team of market-friendly economists, including Finance Minister Mehmet Simsek and central bank governor Hafize Gaye Erkan, who has Wall Street experience.

Erdogan has allowed the lira currency to weaken while promising that the new team would tackle years of economic crisis.

Year-on-year inflation stood at 61.98 percent in November after touching 85 percent in October 2022.

And the central bank expects consumer prices to peak in May of next year at between 70 and 75 percent. Erdogan said early this month that inflation would remain elevated until June.

Erkan made headlines when she told a Turkish daily on Saturday that she has been priced out of Istanbul's property market by rampant inflation, leaving no choice for the former finance executive but to move back in with her parents.

"We haven't found a home in Istanbul. It's terribly expensive. We've moved in with my parents," said the 44-year-old, a former top executive at US financial firms who took up her post in June.

- Test -

Economists said a five-point hike on the same scale as the last three months would have been very popular, but that was more hope than expectation.

Thursday's 2.5-point hike was in line with forecasts.

"This will almost certainly not be the last rate rise in this cycle," Cagri Kutman, Turkish market specialist at KNG Securities, the fixed-income investment bank, said in a note.

"There is much still to be done in taming inflation but the bond market is optimistic that Turkey is on the right track," Kutman added.

"Turkish bonds have been amongst the strongest performing out of major economies over the past month."

Turkish media reported that Simsek and Erkan would travel to New York in January to meet with investors.

Bartosz Sawicki, market analyst at Conotoxia fintech, suggested that the central bank is set to halt the tightening cycle before the local elections in March.

"The following year will put the central bank's independence and determination to stick to a more orthodox stance to the test," Sawicki commented.

N.Flores--SFF