Turkey's central bank hikes policy rate by 250bps to 45%

January 26, 2024 (MLN): Turkey's Central Bank on Thursday decided to increase the one-week repo auction rate (policy rate) by a staggering 250 basis points, taking it to 45% from 42.5%, a press release issued by the Central Bank of Turkey showed.

To recall the central bank in its last meeting raised its policy rate by 250 basis points to 42.5%.

In December, headline inflation increased in line with the outlook.the monetary policy committee board noted.

The current level of domestic demand, rigidity in service prices and geopolitical risks keep inflation pressures alive.

On the other hand, recent indicators indicate that the balancing of domestic demand, with the reflection of monetary tightening on financial conditions, is consistent with the anticipated disinflation process, it said.

The board evaluates that the limited improvement in inflation expectations and pricing behavior continues.

External financing conditions, strengthening of reserves, improvement in the current account balance and demand for Turkish lira assets continue to contribute to exchange rate stability and the effectiveness of monetary policy.

In this context, the underlying trend of monthly inflation continued to decline. 

Taking into account the delayed effects of monetary tightening, the board evaluated that the level of monetary tightness required to establish disinflation has been reached and that this level will be maintained as long as necessary.

The board evaluated that the current level of the policy rate will be maintained until there is a significant decrease in the underlying trend of monthly inflation and inflation expectations converge to the predicted forecast range.

In case of significant and permanent risks to the inflation outlook, monetary tightness will be reviewed.

The board is simplifying the existing micro- and macroprudential framework in a way that will increase the functionality of the market mechanism and strengthen macro-financial stability.

In line with the simplification process, the board will support the monetary transmission mechanism with macroprudential decisions, despite the volatilities that may be observed in loan supply and deposit interest.

In addition to interest rate decisions, the board will continue quantitative tightening by increasing the variety of sterilization tools it uses in order to support the monetary tightening process. 

The board will continue to determine policy decisions in a way that will provide monetary and financial conditions that will reduce the main trend of inflation and reach the 5% target in the medium term, taking into account the lagged effects of monetary tightening.

Indicators regarding inflation and its main trend will be closely monitored and the board will continue to use all the tools at its disposal with determination in line with the main goal of price stability.

The board will continue to make its decisions in a predictable, data-driven and transparent framework, it added.

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