Central Bank hikes key interest rate by 500 bps to 50 percent

ANKARA

Türkiye’s Central Bank has decided to opt for lifting the key policy rate, increasing the one-week repo auction rate from 45 percent to 50 percent.

Most economists had expected the Central Bank, which held the policy rate steady last month after eight straight increases, to keep the rate unchanged at the Monetary Policy Committee (MPC) meeting on March 21.

Finance Minister Mehmet Şimşek said last week that the Central Bank has a "free hand" and policymakers at the bank will do what is necessary to reduce inflation.

In response to the deterioration in the inflation outlook, the committee decided to raise the policy rate, the bank said in a statement released after the MPC meeting, noting that in February, led by services inflation, the underlying trend of monthly inflation was higher than expected.

A tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed and inflation expectations converge to the projected forecast range, the statement added.

The committee also decided to adjust the monetary policy operational framework by setting the Central Bank overnight borrowing and lending rates 300 basis points below and above the one-week repo auction rate, respectively, the bank said in the statement.

Monetary policy stance will be tightened in case a significant and persistent deterioration in inflation is foreseen, according to the bank.

The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in the Turkish Lira, and improvement in inflation expectations, it said, adding that consequently disinflation will be established in the second half of 2024.

While imports of consumption goods and gold slowed down and contributed to the improvement in the current account balance, other recent indicators imply that domestic demand remains resilient, the statement stressed.

Stickiness in services inflation, inflation expectations, geopolitical risks, and food prices keep inflation pressures alive, the bank warned.

The bank said it closely monitors the alignment of inflation expectations and pricing behavior with projections and the impact of wage increases on inflation.

Monetary transmission mechanism will continue to be supported in case of unanticipated developments in credit growth and deposit rates, while market liquidity will be closely monitored and sterilization tools will continue to be effectively used whenever needed, the bank added.