Interest rate hike by Turkey’s Central Bank

The Central Bank of the Republic of Turkey (TCMB) Monetary Policy Committee convened today (November 19) and has decided to increase the policy rate (one-week repo auction rate) from 10.25 to 15 percent.

Chaired by Central Bank Governor Naci Ağbal, the Monetary Policy Committee has released a statement after its meeting.

"The Monetary Policy Committee (MPC) has decided to increase the policy rate (one-week repo auction rate) from 10.25 percent to 15 percent, and to provide all funding through the main policy rate, which is the one-week repo auction rate," the statement of the Central Bank has read, explaining the reasons for the interest rate hike briefly as follows:

'Uncertainties regarding global economic activity'

"Global economic activity has recovered partially in the third quarter. However, uncertainties regarding global economic activity heightened due to the recent increase in COVID-19 cases.

"The recovery in economic activity continues. Partial restrictions introduced due to the increasing number of cases heighten uncertainties on the short-run outlook of economic activity, particularly the services sector.

"Besides, strengthening domestic demand, due to the lagged effects of strong credit impulse during the pandemic, affects the current account balance adversely through the imports channel.

'Depreciation in Turkish lira...'

"The lagged effects of depreciation in Turkish lira, increasing international food prices and deterioration in inflation expectations affect the inflation outlook adversely. While tracked data for November point to an increase in inflation due to the recent exchange rate volatility, this is assessed to be temporary with the decisive monetary policy stance.

"Accordingly, the Committee has decided to implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process.

"In the periods ahead, all factors affecting inflation will be taken into account, and the tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved."

As reported by the state-run Anadolu Agency (AA), the AA Finance Desk survey of 27 economists yesterday (November 18) forecast a rise in interest rates, ranging between 200 and 550 basis points. The survey also showed that economists' average year-end interest rate forecast was 15.25 percent, ranging from 13.75 percent to 16.25 percent.

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. The interest rate was kept constant on October 22. (SD)