Turkish Central Bank hikes interest rates, surprising markets

ANKARA

The Turkish Central Bank on Thursday announced an interest rate hike of one percentage point above market expectations.

The bank's policy rate – also known as the one-week repo rate – was raised 200 basis points to 19%, up from 17%.

The median forecast by 24 economists surveyed by Anadolu Agency last Friday was a rise in the one-week repo rate of 100 base points, i.e., one percentage point.

Following the move, the Turkish lira appreciated nearly 2% against the US dollar – to 7.3280 from 7.4760.

Given the upside risks to inflation expectations, pricing behavior, and the medium-term inflation outlook linked to these developments, the bank said that the Monetary Policy Committee decided on employing "a front-loaded and strong additional monetary tightening."

Additional monetary tightening will be delivered if needed, it also said.
Considering the end-2021 forecast target, a tight monetary policy will be maintained until strong indicators point to a permanent fall in inflation and price stability, the bank noted.

"The balance between the monetary policy rate and actual/expected inflation will be sustained decisively to maintain a strong disinflationary effect until permanent price stability, and the 5% target is reached," it underlined.

Sustaining the tight monetary policy stance, the bank said it would enhance macroeconomic and financial stability positively by facilitating the fall in the country risk premium, the reversal in currency substitution, the accumulation of foreign exchange reserves, and the perpetual decline in financing costs.

Economic activity is on a strong course as the pandemic-related restrictions are being eased, the bank noted. However, risks remain significant depending on possible developments regarding the course of the pandemic.

"Strong domestic demand due to the cumulative effects of high credit growth during the pandemic and the rise in import prices continue to adversely affect the current account balance," it said, adding, on the other hand, credit growth, which has slowed down amid tighter financial conditions, has recently trended upwards.

Domestic demand conditions, cumulative cost effects, in particular, the exchange rate effects, increasing international food and other commodity prices, and high levels of inflation expectations continue to affect the pricing behavior and inflation outlook adversely, it underlined.
Last month, Turkey saw a 15.61% annual hike in consumer prices, according to the country's statistical authority.

The Turkish Central Bank has set a medium-term inflation target of 5%.

According to its schedule, the bank will hold twelve Monetary Policy Committee meetings this year.