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Turkey’s smaller-than-expected rate hike comes as relief for banks

Turkey’s new economic chiefs are scrambling to navigate a return to rational policies as the lira continues to tumble, threatening to stoke inflation.
People wait to exchange money at a currency exchange shop on June 23, 2023 in Istanbul, Turkey. The Turkish Lira weakened to a record low of 25.74 against the dollar, a day after the central bank hiked interest rates from 8.5 percent to 15 percent in the first rate decision since the appointment of new central bank governor Hafize Gaye Erkan and the re-election of President Recep Tayyip Erdogan last month. (Photo by Chris McGrath/Getty Images)
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ISTANBUL — The sizeable but smaller-than-expected rate hike by Turkey’s Central Bank has come as a relief for banks, which had feared the fallout of a much more aggressive and abrupt increase under a new economic leadership pledging a return to “rational” management of the economy. 

In a departure from President Recep Tayyip Erdogan’s unorthodox policy of cutting rates despite soaring inflation, the central bank raised its policy rate by 650 basis points to 15% on Thursday. The move came after Erdogan appointed a new governor, Hafize Gaye Erkan, and a new treasury and finance minister, Mehmet Simsek, in a bid to regain investor confidence and revive the flow of foreign capital to ease Turkey’s foreign exchange crunch. The hike, however, was smaller than most forecasts, with the bank’s policy rate still well below the nearly 40% inflation rate. 

In announcing the decision, the central bank signaled a gradualist approach to further hikes down the road. “Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” the statement said.

The rate had been widely expected to be raised to 20% or more, with Goldman Sachs forecasting a drastic move to 40%.

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