Turkey opts for new tightening strategy after signaling a pause to hikes

Turkey’s central bank has implemented a new approach to combat rising inflation.

Instead of further increasing interest rates, it has instructed banks to set aside portions of their lira reserves in blocked accounts.

This move has resulted in higher loan rates and reduced loan limits for banks.

Some banks have even stopped lending or recalled previously granted loans, creating a liquidity squeeze.

This strategy aims to restrict the supply of money in the market, which can help curb inflation.

However, economists warn that the methodology is crucial.

If it is mishandled, it could lead to unintended consequences and undermine market expectations.

The central bank’s actions have caused a decline in Turkish bank stocks and raised concerns among analysts.

Data shows that Turkey’s consumer price inflation soared to 67.07% in February, fueling speculation that the central bank may need to resume raising interest rates despite previous indications to the contrary.

The new measures come amidst concerns about dwindling capital inflows and falling foreign exchange reserves.

With local elections approaching in March, pressures are mounting on Turkish policymakers to address the economic challenges facing the country.

Economists predict that further tightening measures may be necessary in the future to stabilize inflation and support economic growth.