Turkey: Central Bank hikes interest rates

Bank raises 1-week repo rate its main policy rate from 10.25% to 15%, via which it will provide all funding

Turkey’s Central Bank on Thursday increased its one-week repo rate also known as the bank’s policy rate from 10.25% to 15%, tightening its monetary policy to ensure price stability.

The decision was announced in a statement following the bank’s first policy meeting under its new governor, former Finance Minister Naci Agbal, who was appointed on Nov. 7.

The Monetary Policy Committee (MPC) decided to provide all funding through the main policy rate, which is the one-week repo auction rate.

“In the periods ahead, all factors affecting inflation will be taken into account, and the tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved,” the bank said.

In a statement, the bank identified the “lagged” effects of depreciation in the Turkish lira, as well as increasing international food prices and worsening inflation expectations as factors that have adversely affected the country’s inflation outlook.

“While tracked data for November point to an increase in inflation due to the recent exchange rate volatility, this is assessed to be temporary with the decisive monetary policy stance,” it said.

Underlining that the recovery in economic activity continues, the bank said partial restrictions introduced against the novel coronavirus pandemic amid rising infections heightened uncertainty in the short-term outlook on economic activity, particularly in the services sector.

“Besides, strengthening domestic demand, due to the lagged effects of strong credit impulse during the pandemic, affects the current account balance adversely through the imports channel.”

Strong monetary tightening against inflation

The bank made it clear that it would employ transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process.

“The permanent establishment of a low inflation environment will affect macroeconomic and financial stability positively through the fall in country risk premium, reversal in the dollarization trend, accumulation of foreign exchange reserves and the perpetual decline in financing costs.”

It added that Central Bank funding will be provided through the one-week repo rate, which will be the main policy tool and “the only indicator for the monetary stance.”

On Wednesday, Anadolu Agency’s Finance Desk survey of 27 economists forecast a rise in interest rates, ranging between 200 and 550 basis points.

The survey also showed that economists’ average year-end interest rate forecast was 15.25%, ranging from 13.75% to 16.25%.

Last month, the Central Bank kept its one-week repo rate also known as its policy rate steady at 10.25%.

In its eight meetings in 2019, the bank cut the rate by a total of 1,200 basis points, from 24%.

This year, the bank boosted the number of its MPC meetings to 12.

Anadolu Agency

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