Turkey’s central bank raised its policy interest rate for the fourth time since September 2020 in light of the adverse outlook for inflation and reiterated it would maintain a tight monetary policy stance “decisively” and for an extended period until there is a permanent fall in inflation.
The Central Bank of the Republic of Turkey (CBRT) raised its one-week repurchase auction rate by another 200 basis points to 19.0 percent, more than expected by analysts but by the same amount as three of its last four rate hikes.
Since September 2020, when the central bank changed course after 9 rate cuts from July 2019 to May 2020, the policy rate has been raised by 10.75 percentage points.
Three of these rate hikes have taken place under the current governor, Naci Agbal, who was installed by Turkey’s strong-willed president Tayyip Erdogan.
Turkey becomes the second major emerging market central bank after Brazil to raise rates this week to curb rising inflation as economies recover after the COVID-19 pandemic and the 11th central bank worldwide to raise rates this year.
“Considering the upside risk to inflation expectations, pricing behavior and the medium-term inflation outlook associated with these developments, the MPC (monetary policy committee) has decided to implement a front-loaded and strong additional monetary tightening,” CBRT said, adding it would tighten its monetary policy stance further if necessary.
Turkey’s inflation rate has risen in the last four months and rose to 15.61 percent in February from 11.89 percent in October, more than 3 times the central bank’s inflation target of 5.0 percent.
Despite the monetary tightening, the dampening impact on demand and thus inflation and inflation expectations is delayed by the recent rise in the growth of credit, higher international food and commodity prices, supply constraints and the higher cost of imports from the fall in the lira’s exchange rate since March last year.
In 2020 Turkey’s lira lost 20 percent but rose 1 percent today after the rate hike to 7.37 against the U.S. dollar and is now marginally higher than at the start of this year.
“Economic activity is on a strong course,” the central bank said, adding economic activity was expected to pick up in the services sectors as pandemic-related restrictions are eased.
Last year Turkey’s economy was one of the few to grow, expanding 1.8 percent, up from 0.9 percent in 2019, due to a boost in lending by state banks, and is expected to grow around 5 percent this year.
