Turkey’s central bank has raised its one-week repo rate by 500 basis points to 30% as it continues to battle sky-high inflation, which is approaching 60%.
This is the fourth time since June that the central bank has raised rates; first at 650 bps, then 250 bps in July, followed by the bigger than expected surprise in August of 750 bps.
In the note explaining its rate decision, the Central Bank of Turkey (CBT) said its focus remained on anchoring inflation expectations and achieving disinflation. Although it recognized the rebound in inflation readings in July and August, which raised the general reading by 21 percentage points in two months to 59% year-on-year, the bank once again pointed out the strong domestic demand, the rigidity of commodity prices, services, the increase in oil prices and the jump in inflation expectations are the factors that pose a risk to the inflation outlook.
Therefore, the bank still believes that inflation at the end of the year will approach the upper end of the forecast range provided in the CBT Inflation Report at 62% year-on-year (as also indicated by the forecast in the Medium Term Plan by 65% year-on-year). .
However, on a more positive note, the bank noted that “fiscal regulations and cost pressures arising from wages and exchange rates have largely passed through to prices” and the underlying trend is likely to become in decline, so it maintains its forecast for next year. year, a position also supported by the monetary adjustment measures underway.
The TCC again highlighted that foreign direct investment inflows and an improvement in the current account would contribute to price stability. This month, the bank, signaling a recovery in the outlook for the Turkish lira, inserted a new phrase according to which “increased domestic and external demand for Turkish lira-denominated assets” will also support the price stability objective.
Future guidance remained unchanged as the bank reiterated that:
- It will continue with monetary adjustment measures in a “timely and gradual” manner until a significant improvement in inflation prospects is achieved. While the CBT has maintained its focus on disinflation, it has not provided any guidance on the pace of adjustment in the coming months.
- It will continue to “simplify and improve the existing micro- and macroprudential framework” at a gradual pace. Accordingly, to support the monetary policy stance, it committed to continuing quantitative and selective credit tightening measures. In this context, BTC recently increased reserve requirements for protected currency deposits again from 15% to 25% for maturities of less than six months, to absorb excess liquidity from the banking system. Mehmet Simsek, Minister of Treasury and Finance, recently signaled that he would introduce new regulations on loans and credit cards to control the growth of these products.
With these actions, in the two weeks following the August MPC, the 1-3 month TRY deposit rate jumped 10.1 percentage points to 40.9%, thanks to the 7.5 percentage point rate increase in August already the strategy recently announced by the BCT aimed at gradually reducing the interest rate. the currency-protected deposit system. Interest rates are also rising, which has led to a positive net interest margin in recent weeks.