Central Bank delivers larger-than-expected rate hike

ANKARA

Türkiye’s Central Bank yesterday lifted its key policy rate by 500 basis points from 35 percent to 40 percent, saying that the monetary tightening circle will be completed soon.

Most economists had expected the bank to deliver a hike of 250 basis points.

Since June, the bank has raised the policy rate - the one-week repo auction rate - by a cumulative 3,150 basis points, as part of its efforts to bring inflation under control.

The current level of monetary tightness is significantly close to the level required to establish the disinflation course, said the bank in a statement released after the Monetary Policy Committee meeting yesterday.

“The pace of monetary tightening will slow down, and the tightening cycle will be completed in a short period of time,” it said, adding that the monetary tightness will be maintained as long as needed to ensure sustained price stability.

Inflation expectations and pricing behavior started to show signs of improvement, the bank said.

“On the other hand, recent indicators suggest that domestic demand has started to moderate as the monetary tightening is reflected on financial conditions.”

But it warned that the existing level of domestic demand, the stickiness in services inflation, and geopolitical risks keep inflation pressures alive.

The improvement in external financing conditions, continued increase in foreign exchange reserves, the positive impact of demand rebalancing on current account balance, and the increase in domestic and foreign demand for Turkish lira-denominated assets contribute significantly to exchange rate stability and the effectiveness of monetary policy, according to the bank.

“In light of these developments, a decline in the underlying trend of monthly inflation is observed.”

The annual inflation rate slowed from 61.53 percent in September to 61.36 percent in October.

 Market mechanisms

To increase the functionality of market mechanisms and strengthen macro-financial stability, the committee continues to simplify and improve the existing micro- and macroprudential framework, the statement reiterated.

While lending rates are assessed to be in line with the targeted level of financial tightness, the regulations to increase the share of Turkish Lira deposits and monetary tightening will continue to strengthen the transmission mechanism and improve the funding composition of the banking system, according to the bank.

“In addition to policy rate decisions, the committee will continue to make quantitative tightening decisions to support the monetary policy stance,” it said.