Central Bank hikes key interest rate to 17 pct

ANKARA

The Turkish Central Bank on Dec. 24 announced an interest rate hike of two percentage points, above market expectations.

The bank’s policy rate – also known as the one-week repo rate – rose to 17 percent, up from 15 percent, the bank said in a statement.

The median forecast by 21 economists surveyed by Anadolu Agency on Dec. 18 was a rise of 150 base points. Some economists also predicted a 150-point rise in a Reuters poll.

The bank again pledged to “decisively” keep policy tight to permanently lower inflation, which stood at 14 percent last month and has been above target for years.

Following the move, the Turkish Lira appreciated some 1 percent against the U.S. dollar, with the dollar/Turkish lira rate falling to 7.57 from over 7.61.

Pointing to the partial recovery in global economic activity since the third quarter, the bank underlined that uncertainties prevail due to the recent increase in COVID-19 cases.

It stated that recent restrictions to curb the virus’ spread create uncertainties in the short-run outlook of economic activity, particularly the services sector, despite national income data and indicators for the last quarter pointing to a strong course.

“Domestic demand conditions, cumulative cost effects, in particular the exchange rate effects, increasing international food and other commodity prices, and deterioration in inflation expectations continue to affect the pricing behavior and inflation outlook adversely,” the statement said.

Sustained monetary tightening

It stressed that strong monetary tightening will be implemented to eliminate risks to the inflation outlook, contain inflation expectations, and restore the disinflation process as soon as possible.

“In the forthcoming period, tightness of the monetary policy stance will be decisively sustained until strong indicators point to a permanent fall in inflation in line with the targets and to price stability,” it noted.

Pointing to the positive effect for macroeconomic and financial stability of permanently establishing a low-inflation environment, the bank stated this will be ensured by a fall in the country’s risk premium, the beginning of reverse currency substitution, the accumulation of foreign exchange reserves, and a perpetual decline in financing costs.

In its last meeting on Nov. 19, the Central Bank increased its one-week repo rate from 10.25 percent to 15 percent while taking steps to simplify the operational framework of monetary policy.

It was new governor Naci Ağbal’s first move after taking the reins in a surprise leadership overhaul in which Turkish President Recep Tayyip Erdoğan pledged a new market-friendly economic era and reforms.

Over the course of this year, starting with a rate of 12 percent, the bank has raised its benchmark policy rate a total of 500 basis points.

On Dec. 21, Ağbal said the risk of upward inflation will require a tight and decisive monetary policy stance in 2021, adding that it will be tightened if needed.

“Ağbal has totally passed the test” and showed the bank “is getting serious about inflation,” said Cristian Maggio, head of emerging markets strategy at TD Securities.

The new bank governor has acknowledged that the lira’s roughly 23 percent drop this year has kept inflation lofty, but the bank still sees it dipping to 9.4 percent by the end of 2021.