^{Source: Bloomberg}

In a bold and unexpected move, the Central Bank of the Republic of Turkey (CBRT) raised its key one-week repurchase (repo) rate by 350 basis points on Thursday, lifting it from 42.5% to a staggering 46.0%. This marks a decisive shift in the country's monetary policy trajectory, effectively ending a short-lived easing cycle that began in late 2024.

The aggressive rate hike caught markets off guard, especially after signals earlier this year suggested a more gradual path. However, it underscores growing concerns over spiraling inflation, weakening investor confidence, and geopolitical instability.

Why the Sudden Hike?

Skyrocketing Inflation

Turkey’s annual inflation reached 38.1% in March 2025, up from 35.2% in February and well above the central bank’s medium-term target of 5%. Prices for essentials such as food, housing, and transportation have surged, placing immense pressure on Turkish households and squeezing purchasing power.

Political and Economic Unrest

Adding to the financial strain, Turkey has been rocked by political turmoil. The arrest of Istanbul’s mayor and prominent opposition leader Ekrem Imamoglu in mid-March ignited nationwide protests and triggered massive capital flight. The lira plunged to a historic low of over 40 per U.S. dollar, prompting the central bank to burn through nearly $25 billion in foreign reserves over just three days to stabilize the currency.

In response to the sudden currency crash, the CBRT implemented a 200-basis-point emergency rate hike on March 20, pushing its overnight lending rate to 46%. Thursday’s action, while technically a continuation, formalizes this emergency measure and demonstrates a shift toward a more hawkish and reactive policy stance.

Monetary Policy Committee’s Statement

In its official release, the CBRT emphasized its commitment to a “tight monetary stance” to bring inflation under control:

“Our decisive monetary tightening continues to support the disinflation process through subdued domestic demand, real appreciation of the Turkish lira, and improved inflation expectations,” the Monetary Policy Committee (MPC) said.

The statement also highlighted risks from global trade protectionism, warning that reduced capital flows and declining commodity prices could further complicate the disinflation process.

The central bank pledged to maintain high interest rates until there is clear and lasting progress toward price stability.

Analyst Reactions: A Mixed Bag

Global Markets React

The surprise move sent shockwaves through emerging markets, with Turkish equities dipping slightly before stabilizing later in the day. Bond yields soared, reflecting heightened investor concern about Turkey’s economic trajectory.

“This move reasserts the central bank’s independence and shows they’re serious about tackling inflation,” said Brad Bechtel, global head of FX at Jefferies. “We’ll now see how President Erdogan responds, given his historical opposition to high interest rates.”

Capital Economics Perspective

Nicholas Farr, emerging Europe economist at Capital Economics, noted that the hike signals a heightened concern over upside inflation risks.

“The central bank is clearly responding to the risks posed by a weaker lira, deteriorating capital flows, and inflationary pressures. This hike essentially locks in the emergency tightening we saw in March,” he stated.

Capital Economics now forecasts the one-week repo rate to finish 2025 at 40.0%, a notable upward revision from their previous projection of 35.0%.

Currency Crisis and Policy Measures

To curb further financial fallout from Imamoglu’s arrest, Turkish authorities took several extraordinary steps:

• Short selling was banned on March 23 to prevent stock market manipulation.
• Buyback rules were relaxed to allow corporations to support their stock prices.
• The central bank intervened heavily in forex markets, depleting foreign reserves to defend the lira.

Despite these efforts, market confidence remains fragile.

Looking Ahead: What’s Next for Turkey?

Inflation May Start to Cool

Analysts from JPMorgan and HSBC predict inflation in Turkey will begin to ease modestly by Q3 2025, provided the central bank maintains its hawkish stance and political conditions stabilize.

Monetary Policy Pause Likely After June

There’s growing consensus among economists that further hikes are unlikely in the immediate term. Instead, the CBRT may adopt a “wait-and-see” approach to evaluate the effectiveness of its current measures before deciding on future action.

Bottom Line

Turkey’s central bank has sent a powerful signal to markets and the global financial community: it’s ready to do what it takes to rein in inflation, even if it means navigating political landmines and economic turbulence. With interest rates now among the highest in the world, all eyes will be on Ankara to see if this bold approach will finally tame the inflation beast and restore financial stability.

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