Central Bank lifts key rate for seventh consecutive month

ANKARA

The Central Bank of Türkiye has increased the key interest rate for a seventh consecutive month but said it is nearing the end of the monetary tightening cycle.

As widely expected, the bank hiked the policy rate – the one-week repo auction rate - by 250 basis points to 42.5 percent at the Monetary Policy Committee’s last meeting of 2023 on Dec. 21.

This was a smaller increase than the 500 bps hike the bank delivered in each of the last three months.

Since June, the bank has raised the policy rate by a cumulative 3,400 basis points as part of its efforts to bring inflation under control.

Assessing that monetary tightness is significantly close to the level required to establish the disinflation course, the committee reduced the pace of monetary tightening, the bank said in a statement after the rate-setting meeting.

“The committee anticipates completing the tightening cycle as soon as possible,” 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 but warned that the existing level of domestic demand, stickiness in services inflation, and geopolitical risks keep inflation pressures alive.

The decline in the underlying trend of monthly inflation continues, it added.

The annual inflation rate ticked up from 61.36 percent in October to 61.98 in November. The month-on-month increase in consumer prices, which hit as high as 9.5 percent in June, slowed from 3.43 percent in October to 3.28 percent last month.

“Continued increase in foreign exchange reserves, the positive impact of demand rebalancing on current account balance, and the accelerated increase in domestic and foreign demand for Turkish Lira denominated assets contribute significantly to exchange rate stability and the effectiveness of monetary policy,” the bank said.

Recent indicators suggest that domestic demand continues to moderate as monetary tightening is reflected in financial conditions, according to the bank.

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

In addition to policy rate decisions, the committee will continue to implement quantitative tightening by extending the sterilization tools at its disposal in order to support the monetary tightening process, the bank said.

“Indicators of inflation and underlying trend of inflation will be closely monitored, and the committee will continue to decisively use all the tools at its disposal in line with its main objective of price stability.”