FX.co ★ Turkish central bank tightens policy amid inflation concern

According to the Central Bank of Turkey, the key interest rate has been raised by 250 basis points to 42.5% from 40% annually. At the same time, the interest rate still has room to grow. Analysts from Trading Economics estimate that the key rate was previously above this level more than 20 years ago. In April 2003, it reached 44%, then decreased to 41%. Economists surveyed by Bloomberg predicted that markets expected the Turkish regulator to raise the rate by 250 basis points to 42.5%. In this case, the expectations matched reality. Some analysts, particularly from Standard Chartered, forecasted a more significant increase of 500 basis points. The Central Bank of Turkey plans to complete the cycle of tightening monetary policy at an accelerated pace. The regulator estimates that the current level of domestic demand, prolonged inflation in the services sector, and geopolitical risks are sustaining inflationary pressure. However, recent macroeconomic data showed that domestic demand is gradually decreasing due to the prolonged tightening of monetary policy affecting financial conditions. Representatives of the Turkish Central Bank believe that inflation expectations and consumer prices are showing signs of improvement. The tightening of the Turkish regulator's monetary policy is approaching a level that could lead to deflation. Against this backdrop, the Central Bank of Turkey had to slow down its pace, although it is not yet talking about monetary policy easing.