Turkey’s Central Bank keeps interest rate constant, US dollar skyrockets

Click to read the article in Turkish

The Central Bank of the Republic of Turkey (CBRT) Monetary Policy Committee convened today (October 22) and has decided to keep the policy rate (one-week repo auction rate) at 10.25 percent.

Chaired by Central Bank Chair Murat Uysal, the Monetary Policy Committee has issued a press release after its meeting.

"The Monetary Policy Committee (the Committee) has decided to keep the policy rate (one-week repo auction rate) constant at 10.25 percent, and adjust the monetary policy operational framework and set the margin between the CBRT Late Liquidity Window lending rate and overnight lending rate as 300 basis points," the statement has read.

As there was an expectation for an interest rate hike as it was the case last month, the exchange rates of both the US dollar and Euro against Turkish Lira (TRY) skyrocketed. While the exchange rate of the USD saw 7.95 TRY, that of Euro hit 9.40 TRY. Gram gold, which was traded at the exchange of 480 TRY before the decision, has also increased to 489 TRY.

'Uncertainties on economic recovery persist'

The statement of the Central Bank has briefly read as follows:

"While global economic activity has shown signs of partial recovery in the third quarter following the normalization steps taken by several countries, uncertainties on global economic recovery persist.

"The pandemic disease is closely monitored for its evolving global impact on capital flows, financial conditions, international trade and commodity prices. The recovery in economic activity continues.

"Following recent policy steps, the normalization trend observed in commercial and consumer loans has become more pronounced.

"The expected moderation in imports has started with the phasing out of pandemic-related supportive policies. 

'Inflation was more than expected'

"As a result of fast economic recovery with strong credit momentum, and financial market developments, inflation followed a higher-than-envisaged path. A significant tightening in financial conditions has been achieved, following the monetary policy and liquidity management steps taken to contain inflation expectations and risks to the inflation outlook.

"Accordingly, the Committee has decided to keep the policy rate unchanged, while enhancing flexibility in liquidity management and continuing with liquidity measures until inflation outlook displays a significant improvement."

The course of interest rates in Turkey

After Central Bank Governor Murat Çetinkaya was removed from office and Murat Uysal was appointed in his place, the Monetary Policy Committee took its first decision of interest rate cut in July 2019 and cut the policy rate from its current level of 24 percent to 19.75 percent.

After its meeting on September 12, 2019, the Monetary Policy Committee of the Central Bank lowered the policy rate to 16.50 percent. The Committee reduced the interest rate to 14 percent on October 24, to 12 percent on December 12 and to 11.25 percent on January 16.

On February 19, the Central Bank decreased the policy interest rate from 11.25 percent to 10.75 percent. In the meeting on March 17, the policy interest rate was reduced from 10.75 to 9.75 percent.

In its meeting on April 22, the Bank decreased the policy interest rate from 9.75 to 8.75 percent. On May 21, the interest rate was further reduced to 8.25 percent. The Bank kept this rate unchanged in June, July and August.

In its September meeting, the Monetary Policy Committee of the Central Bank decided to increase the policy rate (one-week repo auction rate) from 8.25 to 10.25 percent. (HA/SD)