Turkey’s central bank raises policy rate by 500bps to 30%

September 21, 2023 (MLN): Turkey's Central Bank decided to increase the one-week repo auction rate (policy rate) by a staggering 500 basis points, taking it to 30% from 25%, monetary policy statement issued by the Central Bank of Turkey showed today.

This was the central bank's fourth straight hike under the stewardship of Governor Hafize Gaye Erkan to control the inflation which stands at around 60%.

The Board decided to continue the monetary tightening process in order to establish disinflation as soon as possible, anchor inflation expectations, and control the deterioration in pricing behavior, the press release on interest rates issued showed today.

Inflation was above expectations in July and August. While the strong course of domestic demand and the rigidity in service prices continue, the increase in oil prices and the ongoing deterioration in inflation expectations create additional upward pressure on inflation.

These factors indicate that inflation will remain close to the upper limit of the forecast range in the Inflation Report (Report) at the end of the year.

It has been evaluated that the cost-oriented pressures and tax regulations arising from wages and exchange rates that have been effective in the recent period have had a significant impact on inflation and that the main trend of monthly inflation will begin to decline.

The Board is determined to establish disinflation in line with the path in the Report in 2024, with the effect of monetary tightening steps.

Direct foreign investments, improvement in external financing conditions, ongoing increase in reserves, support of tourism revenues to the current account, and the increase in domestic and foreign demand for Turkish lira assets will contribute strongly to price stability.

The policy rate will be determined to provide monetary and financial conditions that will reduce the main trend of inflation and reach the 5 percent target in the medium term.

Monetary tightening will be gradually strengthened when and to the extent necessary until a significant improvement in the inflation outlook is achieved. 

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

The simplification process will continue gradually, taking into account impact analyses. In this context, regulations to increase the share of Turkish lira deposits strengthen the monetary transmission mechanism.

In addition to increasing interest rates, the Board will continue to make selective credit and quantitative tightening decisions that will support the monetary tightening process. 

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.

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