While the Central Bank of the Republic of Turkey (CBRT) has maintained its key rate since hiking it by 50 basis points in November last year, it has been tightening its policy stance by other means, such as raising other policy rates, the rate it pays on local lenders' U.S dollar reserves and required reserve ratios in a bid to boost the value of the lira and thus slow down inflation.
It was the third time this year the late liquidity lending rate, currently used by the central bank to provide a large proportion of the funds that banks need, was raised this year.
This lending rate has now been raised by a total of 2.25 percentage points so far this year.
But inflation jumped to 11.29 percent in March, the highest since October 2008, and the second consecutive month of double-digit inflation, well in excess of the bank's target of about 5 percent.
The CBRT's cautious rate hike today comes a week after Turkish President Tayyip Erdogan, an ardent critic of high interest rates, won a referendum that grants him wider powers.
The CBRT said food prices had led to a rapid rise in inflation and while the recent rise in risk appetite by investors may contain some of the pressure on costs, the current level of inflation risks leading to even further cost rises.
Data showed prices of clothing and foot wear rose by 1.99 percent in March from February, followed by a 1.93 percent rise in the cost of food and non-alcoholic beverages.
Looking ahead, the central bank said it's tight monetary policy stance would continue until there is a "significant improvement in the inflation outlook" and "additional monetary tightening will be possible if needed."
After falling sharply in the last two months of 2016, Turkey's lira has staged a slight rebound since hitting a historic low of 3.87 to the U.S. dollar in late January, helped by the central bank's various tightening measures.
Today the lira was trading at 3.59 to the dollar, down 1.7 percent since the start of this year.
The Central Bank of the Republic of Turkey issued the following statement:
Participating Committee Members
Murat Çetinkaya (Governor), Erkan Kilimci, Emrah Şener, Murat Uysal, Abdullah Yavaş.
The Monetary Policy Committee (the Committee) has decided to set the short term interest rates at the following levels:
a) Overnight Interest Rates: Marginal Funding Rate has been kept at 9.25 percent and borrowing rate has been kept at 7.25 percent.
b) One-week repo rate has been kept at 8 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate has been kept at 0 percent, while lending rate has been increased from 11.75 percent to 12.25 percent.
b) One-week repo rate has been kept at 8 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate has been kept at 0 percent, while lending rate has been increased from 11.75 percent to 12.25 percent.
Recently released data indicate a gradual recovery in the economic activity. Domestic demand conditions display a moderate improvement and demand from the European Union economies continues to contribute positively to exports. With the supportive measures and incentives provided recently, the economic activity is expected to gain further pace in the forthcoming period. The Committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly.
Cost push pressures and the volatility in food prices in recent months have led to a sharp increase in inflation. Although the recent improvement in the risk appetite contains some of the upside pressures from cost factors, current elevated levels of inflation pose risks on the pricing behavior. Accordingly, the Committee decided to strengthen the monetary tightening in order to contain the deterioration in the inflation outlook.
The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Tight stance in monetary policy will be maintained until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days."
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