Turkish Central Bank hikes policy rate to 15{4a62a0b61d095f9fa64ff0aeb2e5f07472fcd403e64dbe9b2a0b309ae33c1dfd}

“Turkish Central Bank has hiked 1-week repo rate, known as the policy rate, by 475 basis points from 10.25{4a62a0b61d095f9fa64ff0aeb2e5f07472fcd403e64dbe9b2a0b309ae33c1dfd} to 15{4a62a0b61d095f9fa64ff0aeb2e5f07472fcd403e64dbe9b2a0b309ae33c1dfd}.

The Turkish Lira slightly gained against the U.S. dollar after the announcement of the decision at the monetary policy meeting of the bank.

The bank said in a statement following the Nov. 19 meeting that it decided to:

• Increase the policy rate (one-week repo auction rate) from 10.25 percent to 15 percent, and

• provide all funding through the main policy rate, which is the one-week repo auction rate.

Thus, the Central Bank has decided on the simplification of the interest rate policy, which was a lingering market expectation.

This was the Central Bank’s first policy meeting under its new Gov. Naci Ağbal, whose appointment was followed by the resignation of Treasury of Finance Minister Berat Albayrak, President Recep Tayyip Erdoğan’s son-in-law on Nov. 8, and hir replacement by another former minister, Lütfi Elvan.

Turkish Lira slightly gains against US dollar

The Turkish Lira was trading at historic lows against both the U.S. dollar and the euro ahead of the shuffle, and Erdoğan’s statements on reforms in the economy and the judiciary.

The lira was trading at around 7.7 per dollar ahead of the decision and increased to 7.5 after the decision, before falling back to 7.62 liras.

The Turkish currency has lost more than 20 percent against the greenback this year.

Central Bank statement

Below is the Central Bank statement after the anticipated policy meeting:

• Global economic activity has recovered partially in the third quarter. However, uncertainties regarding global economic activity heightened due to the recent increase in Covid-19 cases.  

• The recovery in economic activity continues. Partial restrictions introduced due to the increasing number of cases heighten uncertainties on the short-run outlook of economic activity, particularly 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.

• The lagged effects of depreciation in the Turkish lira, increasing international food prices and deterioration in inflation expectations affect the inflation outlook adversely. 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. Accordingly, the Committee has decided to implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process.

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

• The Central Bank will attain its main objective of achieving and maintaining price stability by adopting transparency, predictability and accountability principles of the inflation targeting regime. In light of these principles, the 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.

• It should be emphasized that any new data or information may lead the Committee to revise its stance.