Turkey’s central bank raised its policy rate by a stronger-than-expected 675 basis points to 24.0 percent due to significant risks of rising inflation and said it would tighten its monetary policy stance further if needed.
The Central Bank of the Republic of Turkey (CBRT) said prices have risen across the board due to the fall in the lira’s exchange rate and said today’s rate hike was a “strong monetary tightening to support price stability” and it would maintain a tight stance until the outlook for inflation shows a significant improvement.
“Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to the rebalancing process, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered,” CBRT.
So far this year the central bank has raised its one-week repo rate, which was set as its policy rate in May, three times and by a total of 16 percentage points.
Today’s rate hike comes after the central bank on Sept. 3 signaled it would raise rates today.
Following the release of inflation data for August that showed a rise to 17.9 percent from 15.85 percent in July, the central bank said it would adjust its policy stance today due to “significant risks to prices stability.”
At its meeting in July, the CBRT’s monetary policy committee had maintained its key rate, disappointing financial markets deeply and raising fresh doubts over the central bank’s independence from political influence and its commitment to tackle soaring inflation.
In response to capital outflows and strong downward pressure on the lira from the July policy decision, the central bank was forced to tighten its policy by shifting funding to banks from one-week repo auctions to the upper band of its interest rate corridor, effectively raising the cost of funding by 150 basis points to 19.25 percent.
Currency markets welcomed today’s firm rate hike, pushing up the lira’s exchange rate around 4 percent to 6.16 against the U.S. dollar. But it remains 38 percent below the level at the start of 2018.
There are signs that the economy is starting to slow in response to the fall in the lira and rising inflation, with CBRT saying recent data showed an acceleration in the slowdown in domestic demand while external demand is still strong.
“Deterioration in the pricing behavior continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions,” CBRT said.
Turkey’s economy grew by an annual 5.2 percent in the second quarter of 2018, down from 7.3 percent in the first quarter, but economists said growth had been fueled by government spending ahead of June presidential elections and the economy is likely to shrink in the second half of the year.
The Central Bank of the Republic of Turkey issued the following statement:
Recently released data indicate a more significant rebalancing trend in the economic activity. External demand maintains its strength, while slowdown in domestic demand accelerates.
Recent developments regarding the inflation outlook point to significant risks to price stability. Price increases have shown a generalized pattern across subsectors, reflecting the movements in exchange rates. Deterioration in the pricing behavior continues to pose upside risks on the inflation outlook, despite weaker domestic demand conditions. Accordingly, the Committee has decided to implement a strong monetary tightening to support price stability.
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 decisively until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to rebalancing process, 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.”