Turkish central bank raises interest rate by 750 basis points to 25%

The Central Bank of the Republic of Türkiye (CBRT) on August 24 raised its key policy rate, also known as the one-week repo rate, by 750 points from 17.5 per cent to 25 per cent in line with the pledged tightening process for disinflation.

The bank's Monetary Policy Committee (MPC) decided to continue with its earlier announced tightening measures to curb inflation and enforce macro-financial stability, according to Daily Sabah.

"Recent indicators point to a continued increase in the underlying trend of inflation," the bank said.

"The strong course of domestic demand, cost pressures stemming from wages and exchange rates, stickiness of services inflation and tax regulations have been the main drivers."

The bank's simplification process will continue gradually, it said.

In June, during the first meeting under the bank's new governor, Hafize Gaye Erkan, the central bank raised its policy rate by 650 basis points to 15 per cent, before increasing it by another 250 basis points to 17.5 percent last month.

After winning another five-year term in May, Turkish President Recep Tayyip Erdogan overhauled his economic administration by naming respected veteran Mehmet Simsek, as the new economy minister, as well as Gaye Erkan, a former senior US-based bank executive, as a new central bank governor in moves seen as heralding a switch to tighter interest rate policy.

According to an Anadolu Agency (AA) survey last week, economists expected an increase of 100 to 250 basis points having the policy rate expectations ranging from 18.50 per cent to 20.00 per cent. The median estimate of 17 institutions in the Reuters poll on August 21 was a 250-basis-point hike in the policy rate to 20 per cent, with forecasts ranging from 18 per cent to 20.50 per cent.

The bank has begun simplifying macro-prudential measures and has supported the rate hikes with qualitative and selective credit tightening to address inflation. On August 20, the CBRT said that it lifted targets applied to banks for certain levels of conversions of foreign exchange deposits to the lira-protection scheme, known as KKM.

The bank said the policy rate would be determined in a way that will create monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and pledged further tightening "as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved."

"Foreign direct investment, improvement in external financing conditions, continued increase in foreign exchange reserves, and the positive impact of tourism revenues on the current account balance will contribute significantly to price stability," the bank said in its report on the decision to increase the interest rates.

Commenting on the decision, after the announcement of the rate hike, Minister Simsek said, "We are determined, price stability is our top priority."

The annual inflation rate, as measured by the consumer price index (CPI) lowered to 38.21 percent in June, after leaping to a 25-year high above 85 per cent in October last year. It rose again to nearly 48 percent last month due to the lira’s decline and various tax hikes and officials have acknowledged it would rise further toward the year-end.

Following the CBRT's interest rate decision, the BIST 100 index rose by 2.73 per cent, while the Turkish lira was up by 1.6 per cent against the US dollar at 26.75 at 2:20 p.m. local time.