Turkey’s Central Bank keeps interest rate constant

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The Central Bank of the Republic of Turkey Monetary Policy Committee convened today (January 21) and has decided to keep the policy rate (one-week repo auction rate) at its current level of 17 percent.

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

Emphasizing that the "economic activity is on a strong course," the Commitee has noted that "domestic demand conditions, cumulative cost effects, in particular the exchange rate effects, increasing international food and other commodity prices and high levels of inflation expectations continue to affect the pricing behavior and inflation outlook adversely."

'Slowdown in services and related sectors'

The statement has briefly said: "Economic activity is on a strong course. Although the downward effects of the pandemic-related restrictions on the economy are more confined compared to the second quarter of last year, the slowdown in activity in services and related sectors and uncertainties surrounding the short-run outlook of these sectors prevail.

"The strengthening domestic demand, due to the cumulative effects of high credit growth during the pandemic, continues to have an adverse effect on the current account balance. Nevertheless, credit growth has started to slow down amid tighter financial conditions.

'In particular, the exchange rate effects...'

"Domestic demand conditions, cumulative cost effects, in particular the exchange rate effects, increasing international food and other commodity prices and high levels of inflation expectations continue to affect the pricing behavior and inflation outlook adversely.

"The decelerating impact of the strong monetary tightening implemented in November and December MPC meetings on credit and domestic demand is expected to become more significant; hence the effects of demand and cost factors on inflation are envisaged to wane gradually.

Emphasis on 'tight monetary stance'

"On the other hand, the developments in international commodity prices, supply constraints intensifying in some sectors, and the adjustments in wage and administered prices maintain their importance for the medium-term inflation outlook. Accordingly, the MPC, taking into account the end-2021 forecast target, has decided to maintain decisively the tight monetary policy stance for an extended period until strong indicators point to a permanent fall in inflation and price stability.

"As regards to the indicators pointing to a permanent fall in inflation and price stability, indicators for the underlying trend of inflation and pricing behavior, diffusion indices, demand and cost factors, and inflation expectations will be monitored closely for their compatibility with the targets in the forecast horizon. Additional monetary tightening will be delivered if needed."

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, 2020.

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.

On November 7, 2020, Naci Ağbal was appointed as the new Governor of the Central Bank of Turkey by a Presidential decree.

Most recently, the Central Bank announced an interest rate hike, raising the policy rate from 15 to 17 percent in December 2020. (SD)