Turkey's central bank, now with its fourth governor in five years, raised its policy rate for the second time in three months in what it described as a "transparent and strong monetary tightening" and pledged a tight policy stance "will be decisively sustained until a permanent fall in inflation is achieved."
The Central Bank of the Republic of Turkey (CBRT) raised its one-week repurchase auction rate by a sharp 475 basis points to 15.0 percent - in line with expectations - and has now raised the rate by 675 points following the 200 point rate hike in September.
The two rate hikes more than erase the five rate cuts from January to May so the one-week repo rate has now been raised by a net 300 basis points this year.
CBRT began cutting its rate in July 2019 from 24.0 percent so the net reduction in the key interest rate in 16 months still amounts to 9 percentage points.
In a sign the rate hike and pledge to maintain high rates illustrates a long-awaited change in authorities' approach to monetary policy, the Turkish lira continued its recent rise after plunging 30 percent to new record lows on fears of political interference in monetary policy and rising inflation.
The lira traded at 7.55 to the U.S. dollar today and is up almost 13 percent since a record low on Nov. 8, a few days after Turkey's president, Tayyip Erdogan, on Nov. 6 fired Murat Uysal as central bank governor and replaced him with ex-finance minister Naci Agbal.
However, the lira still remains 21 percent below its level at the start of this year.
On Nov. 8 the shift in the leadership of Turkey's economic policy took another twist as Finance Minister Berat Albayrak, Erdogan's son-in-law, resigned after taking over in mid-2018.
On Nov. 9 the bank's new governor, Agbal, issued a statement that underscored his commitment to price stability. This immediately comforted investors who boosted the lira and Turkish bonds as they took the statement as a sign the central bank was now ready to get serious about tackling inflation.
The new confidence in Turkey's economic leadership was further boosted on Nov. 11 when Erdogan pledged a new economic strategy based on stability, lower inflation and international investment, a sharp change in rhetoric by the country's president who on countless occasions has called for lower interest rates, arguing high interest rates cause high inflation.
Turkey's inflation rate has remained around 12 percent this year - it rose to 11.89 percent in October from 11.75 percent in September - and CBRT said the lagged effects of lira depreciation, rising international food prices and deteriorating inflation expectations were having an adverse impact on the outlook for inflation, which is expected to rise further in November.
"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," the bank said, adding the tight policy would be sustained until there is a permanent decline in inflation.
In another sign of the changed in tone by the central bank, it said it would now provide all funding to banks through its main policy rate, the one-week repo auction, which it said will be the only indicator of its monetary stance.
In recent months the central bank had resorted to various back-door measures to tighten its policy, such as raising the late liquidity rate, confusing financial markets about its commitment to fighting inflation.
"The central bank will attain its main objective of achieving and maintaining price stability by adopting transparency, predictability and accountability principles of the inflation targeting regime," CBRT said.
The Central Bank of the Republic of Turkey issued the following statement:
"Participating Committee Members
Naci Ağbal (Governor), Murat Çetinkaya, Ömer Duman, Uğur Namık Küçük, Oğuzhan Özbaş, Emrah Şener, Abdullah Yavaş.
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
- provide all funding through the main policy rate, which is the one-week repo auction rate.
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.
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.
The permanent establishment of a low inflation environment will affect macroeconomic and financial stability positively through the fall in country risk premium, reversal in the dollarization trend, accumulation of foreign exchange reserves and the perpetual decline in financing costs.
The Central Bank will attain its main objective of achieving and maintaining price stability by adopting transparency, predictability and accountability principles of the inflation targeting regime. In light of these principles, the Central Bank funding will be provided through the one-week repo rate, which will be the main policy tool and the only indicator for the monetary stance.
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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