Turkish Central Bank hikes interest rates

Bank raises 1-week repo rate – policy rate – 200 basis points from 15% to 17%, above market expectations

Tuba Sahin   | 24.12.2020
Turkish Central Bank hikes interest rates


 The Turkish Central Bank on Thursday announced an interest rate hike of two percentage points, above market expectations.  

The bank's policy rate – also known as the one-week repo rate – rose to 17%, up from 15%, the bank said in a statement. 

The median forecast by 21 economists surveyed by Anadolu Agency last Friday was a rise of 150 base points, i.e. 1.5 percentage points. 

Following the move, the Turkish lira appreciated some 1% against the US dollar, with the dollar/Turkish lira rate falling to 7.57 from over 7.61.

Pointing to the partial recovery in global economic activity since the third quarter, the bank underlined that uncertainties prevail due to the recent increase in COVID-19 cases. 

It stated that recent restrictions to curb the virus’ spread create uncertainties in the short-run outlook of economic activity, particularly the services sector, despite national income data and indicators for the last quarter pointing to a strong course.

"Domestic demand conditions, cumulative cost effects, in particular the exchange rate effects, increasing international food and other commodity prices, and deterioration in inflation expectations continue to affect the pricing behavior and inflation outlook adversely," the statement said. 

Sustained monetary tightening

It stressed that strong monetary tightening will be implemented to eliminate risks to the inflation outlook, contain inflation expectations, and restore the disinflation process as soon as possible.

"In the forthcoming period, tightness of the monetary policy stance will be decisively sustained until strong indicators point to a permanent fall in inflation in line with the targets and to price stability," it noted. 

Pointing to the positive effect for macroeconomic and financial stability of permanently establishing a low-inflation environment, the bank stated this will be ensured by a fall in the country’s risk premium, the beginning of reverse currency substitution, the accumulation of foreign exchange reserves, and a perpetual decline in financing costs.

In its last meeting on Nov. 19, the Central Bank increased its one-week repo rate from 10.25% to 15% while taking steps to simplify the operational framework of monetary policy.

Over the course of this year, starting with a rate of 12%, the bank has raised its benchmark policy rate a total of 500 basis points.

Speaking last Monday, Naci Agbal, the bank’s governor, said the risk of upward inflation will require a tight and decisive monetary policy stance in 2021, adding that it will be tightened if needed.

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