Turkey's central bank once again surprised financial markets by keeping its main interest rate steady but continued its recent policy of tightening monetary conditions through a variety of other tools by raising the upper bound of its interest rate corridor.
The Central Bank of the Republic of Turkey (CBRT) kept its one-week repo rate steady at 10.25 percent but widened the margin between the late liquidity window lending rate and overnight lending to 300 basis points by raising the late liquidity rate by 150 points to 14.75 percent.
Today's decision by the bank's monetary policy committee follows last month's surprise 200 basis point hike in the one-week repo rate, the first outright rate hike in two years, and a series of back-door measures to tighten policy in response to accelerating inflation and a steady drop in the lira.
"As a result of fast economic recovery with strong credit momentum, and financial market developments, inflation followed a higher-than-envisaged path," CBRT said, adding financial conditions had tightened following its earlier steps to contain inflation expectations and risks to the 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 bank added.
After falling steadily since early August, Turkey's lira rose at the start of this week, likely in anticipation of another rate hike. But in response to today's decision, the lira nose-dived 2 percent to a new record low of 7.96 to the U.S. dollar and is now down 25.3 percent this year.
Turkey's inflation rate has been steady the last three months at 11.75 percent in September, 11.77 percent in August and 11.76 percent in July, only slightly below a 2020-high of 12.62 percent in June.
According to Reuters, 17 economists polled had expected CBRT to raise its rate between 100 and 300 basis points to ensure a positive real interest rate.
Although CBRT said "the recovery in economic activity continues," it also noted the expected moderation in imports had begun due to a phasing out of policies to support the economy from the impact of COVID-19 while exports were recovering - helped by the level of the exchange rate and relatively low commodity prices - helping support the current account.
Turkey's gross domestic product shrank by a quarterly 11 percent in the second quarter after the first quarter fell 0.1 percent. On a year-on-year basis, GDP contracted 9.9 percent in the second quarter after it rose 4.4 percent in the first quarter.
"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 central bank said, adding advanced and emerging economies are continuing to maintain expansive monetary and fiscal policies.
The Central Bank of the Republic of Turkey issued the following press release:
"Participating Committee Members
Murat Uysal (Governor), Murat Çetinkaya, Ömer Duman, Uğur Namık Küçük, Oğuzhan Özbaş, Emrah Şener, Abdullah Yavaş.
The Monetary Policy Committee (the Committee) has decided to:
- keep the policy rate (oneweek 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.
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. Advanced and emerging economies continue to maintain expansionary monetary and fiscal stances. 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. The strong recovery in exports of goods, relatively low levels of commodity prices and the level of the real exchange rate will support the current account balance in the upcoming periods.
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 Committee assesses that restoring the disinflation process is a key factor for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery. Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance. In this respect, monetary stance will be determined by considering the indicators of the underlying inflation trend to ensure the continuation of the disinflation process. The Central Bank will continue to use all available instruments in pursuit of the price stability and financial stability objectives.
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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