İmamoğlu effect: Turkish Central Bank raised policy rate to 46 pct

With a surprise decision, the Central Bank (CBRT) Monetary Policy Committee (MPC) raised the policy rate by 350 basis points to 46 percent on April 17. The Committee raised the Central Bank’s overnight lending rate from 46 percent to 49 percent and the overnight borrowing rate from 41 percent to 44.5 percent.
In its written statement, the Central Bank said that it had to raise interest rates (despite the known opposition of President Tayyip Erdoğan) due to the following factors:
– Monthly core goods inflation is expected to rise slightly in April due to developments in financial markets.
– Leading indicators suggest that domestic demand has been above projections and has had a dampening effect on inflation.

– Inflation expectations and pricing behavior remain a risk factor for the disinflation process.
The interest rate, which the Central Bank has gradually reduced from 50 percent since December 2023 to 42.5 percent in March 2024, has again exceeded its level in January 2024.

Central Bank and the İmamoğlu effect

Before the recent political developments, the Central Bank was expected to keep interest rates at 42.5 percent in April.
However, especially after the sharp reaction in the markets following the detention of Ekrem İmamoğlu, the Metropolitan Mayor of İstanbul on March 19 (who was arrested and removed from office afterwards), economists such as Mahfi Eğilmez, Fatih Özatay, Hakan Kara and foreign investors such as Jefferies, for example, started to say that the policy rate should be raised to 46 percent, like the lending rate, so that at least the damage could be mitigated.
Credible economists were worried that the decision to arrest İmamoğlu would further burden the economy. The latest MPC decision shows that they were right.
The fact that the Central Bank, which was reported in the media to have sold around 40 billion dollars from public reserves to curb the increase in the exchange rate after İmamoğlu’s detention, raised interest rates again is not good news for the anti-inflation program led by the Treasury and Finance Minister, Mehmet Şimşek.