Turkey's Central Bank raises policy rate by 750bps to 25%

August 24, 2023 (MLN): Turkey's Central Bank decided to increase the one-week repo auction rate (policy rate) by a staggering 750 basis points, taking it to 25% from 17.5%, monetary policy statement issued by the Central Bank of Turkey showed today.

The decision aims to pursue a monetary tightening process to promptly establish disinflation, anchor inflation expectations, and manage pricing behavior.

The Board noted that factors such as domestic demand, wage and exchange rate pressures, and rigidity in services inflation contribute to the rising trend of inflation.

Additionally, the Board expects disinflation to take hold in 2024, aided by the effect of monetary tightening measures.

They anticipate that foreign direct investments, improved external financing, growing reserves, and tourism revenue will bolster price stability.

The policy rate will be adjusted to curb underlying inflation and create conditions for reaching the 5% inflation target in the medium term.

The gradual strengthening of monetary tightening will persist until a substantial improvement in the inflation outlook is achieved.

The Board is streamlining the existing micro- and macroprudential framework to enhance market mechanisms and macro financial stability.

These simplification efforts will continue while considering impact analysis.

To reinforce the monetary transmission mechanism, regulations will boost the proportion of Turkish lira deposits.

Alongside interest rate hikes, the Board will make selective credit and quantitative tightening decisions to support the monetary tightening process.

The Board commits to monitoring inflation indicators and maintaining a data-oriented, transparent approach to its decisions in pursuit of price stability.

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