CBRT Increases the Interest Rates Amid Political Chaos and High Economic Volatility

On the 17th of April, the Central Bank of the Republic of Türkiye declared the new interest rate for the month. In contrast to the expectations of the markets, the interest rate was not decreased, and instead, a rise of 350 basis points was made. This increase from 42.5% to 46% surprised society and gave out signals of a chaotic economic state.

As the interest rates were recently decreasing with statements regarding the positive state of the economy and signs of an easing economic cycle being available, the expectations were for another decrease in the rate. However, the volatility of the market economy was severely triggered by the arrest of Ekrem Imamoglu, the mayor of Istanbul, and other important politicians. His arrest, as the main political rival of President Erdogan, has caused large protests all across Türkiye and, thus, economic instability. These protests were the largest that the country had experienced in a decade and caused such an unstable economy that investors and even savers moved from the lira to foreign currencies.

These economic issues made the Central Bank sell 50 billion dollars to protect the value of the Turkish lira and also purchase 120 billion liras in bonds. These sales and purchases resulted in a strengthened level of the Turkish lira against the US dollar, taking it to levels around 38 after witnessing levels close to 42, its record high point. Moreover, the overnight lending rate also faced an increase to 49%, as well as the overnight borrowing rate, which rose up to 44.5%. A longtime Turkey observer, Tim Ash, said that such recent events “have strengthened the Turkish Central Bank’s mandate to do whatever it takes to fight inflation.”

Graph from Reuters

Giving an answer to the questions of the surprised market, pointing out the plans for the following months and the steps that would be taken in case of a change in the average conditions, the Monetary Policy Committee stated that the “main trend in inflation declined in March” but warned that core goods inflation is likely to increase in April “due to developments in financial markets,” expecting the services inflation to remain static. The Turkish inflation in March fell more than expected, to a level of 38%; the bank is aiming to get the rate to 24 percent by the end of 2025. The committee noted these increases in rates, and the “tight monetary policy stance” will continue until a significant and “permanent decrease in inflation and price stability are achieved.” They also added that as the protectionism trend is growing, especially referring to the global tariffs, it may have negative impacts on Türkiye’s disinflation steps by affecting commodity prices and flows of capital.

The increase in the interest rate was made by the bank to control the inflation levels as well as to get the volatility of the economy under control. Further steps are being taken despite not being in line with the market expectations. Society is both for and against these steps, and different viewpoints are available.

Edited by: Ömer Gökce, Yağmur Ece Nisanoğlu