Over 40% Returns Just from Bank Deposits... Turkiye Raises Benchmark Interest Rate for 7th Consecutive Time

Base Interest Rate Reaches 42.5%... Increase Starting in May
Inflation Rate in the 60% Range..."Interest Rates Must Rise Further"

Turkey implemented its 7th interest rate hike just seven months after starting rate increases, raising the benchmark rate from 40% to 42.5%, an increase of 2.5 percentage points. Since President Recep Tayyip Erdogan's re-election, he has aggressively raised the benchmark interest rate to curb inflation, causing rates to surge by more than 30% in a short period. Both bank deposits and bond yields have sharply increased, attracting domestic and foreign capital back to Turkey.

[Image source=Reuters Yonhap News]

According to Bloomberg on the 21st (local time), the Central Bank of Turkey raised the benchmark interest rate from 40% to 42.5% at the Monetary Policy Committee (MPC) meeting held that day. While the central bank had been raising rates by 5 percentage points every month since May, this time it increased the rate by only 2.5 percentage points, suggesting that the tightening policy is nearing its end.

Following the rate decision, the Central Bank of Turkey stated, "We have slowed the pace of tightening based on the judgment that monetary tightening has substantially approached the level necessary to firmly establish the disinflation process," and added, "We will conclude this rate hike cycle as soon as possible."

The rapid surge in Turkey's benchmark interest rate was largely influenced by political factors. Before the presidential election in May, President Erdogan forcibly maintained a low-interest-rate policy to secure his approval ratings, keeping the benchmark rate at around 8.5%. Meanwhile, Turkey's inflation soared, reaching 85% in October last year and currently remaining in the 60% range.

[Image source= Xinhua News Agency]

After President Erdogan succeeded in his re-election, he announced the abandonment of the low-interest-rate policy that had caused the rapid inflation, prompting the Central Bank of Turkey to immediately switch to a tightening policy and consecutively raise rates seven times. The current interest rate level is five times higher than at the beginning of the year and is the highest during Erdogan's nearly 20-year tenure.

As a result of the sharp interest rate hikes, domestic and foreign capital that had been flowing out of Turkey is now returning. Since the rate hikes began in May, large-scale deposits have poured in, attracted by the significantly increased interest earnings. On May 12, when the Central Bank of Turkey announced the removal of the benchmark rate cap and its commitment to aggressive rate hikes, a massive inflow of funds amounting to $120 billion (approximately 156 trillion KRW) entered Turkish lira deposits.

With Turkish bond yields exceeding 35%, foreign capital is also returning steadily. Experts analyze that since Turkey's inflation remains extremely high, there is a possibility of several more rate hikes continuing until the end of next year.

Chara Kurtman, a Turkey expert at KNG Securities in London, said, "There is still much work to be done to control inflation, so this will not be the last rate hike," adding, "The bond market is positively evaluating that Turkey has finally found the right direction."