Turkish Central Bank raises policy rate 750 basis points to 25%

ANKARA

Türkiye’s Central Bank has hiked its policy rate from 17.5 percent to 25 percent, delivering on its promise of tightening.

The bank lifted the policy rate, the one-week repo rate, for a third month in a row after Hafize Gaye Erkan was appointed its governor in June.

Most economists had expected the bank to deliver a 250 bps rate hike to 20 percent.

“The committee decided to continue the monetary tightening process in order to establish the disinflation course as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior,” the bank said in a statement released after the Monetary Policy Committee Meeting on Aug. 24.

The MPC convened with its newly appointed three members, Cevdet Akçay, Fatih Karahan and Hatice Karahan. With the move, the bank has increased the policy rate by a huge 1,650 bps since June. In June it delivered a 650 bps hike and lifted the rate by another 250 bps in July.

“Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved,” the statement added.

The bank reiterated that in order to increase the functionality of market mechanisms and strengthen macro-financial stability, it will continue to simplify and improve the existing micro- and macroprudential framework.

Recent regulations targeting a rising share of Turkish lira deposits will strengthen the monetary transmission mechanism, it said, adding that in addition to the increase in the policy rate, the committee will continue to make decisions on quantitative tightening and selective credit tightening to support the monetary policy stance.

“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.”

Recent indicators point to a continued increase in the underlying trend of inflation, said the bank, citing the strong course of domestic demand, cost pressures stemming from wages and exchange rates, the stickiness of services inflation and tax regulations as the main drivers.

“However, given the monetary tightening stance, the committee still anticipates that disinflation will be established in 2024,” it said.

The annual inflation rate picked up to 47.8 percent in July after declining in the previous eight months.

The Turkish Lira rallied immediately after the bank announced its rate decision. It gained as much as 2 percent against the U.S. dollar minutes after the rate hike.