Interest rate hike by Turkey’s Central Bank

* Photo: Anadolu Agency (AA)

The Central Bank of the Republic of Turkey (TCMB) Monetary Policy Committee convened today (September 24) and has decided to increase the policy rate (one-week repo auction rate) from 8.25 to 10.25 percent.

Chaired by Central Bank Chair Murat Uysal, the Monetary Policy Committee has released a statement after its meeting. "The Monetary Policy Committee has decided to increase the policy rate (one-week repo auction rate) from 8.25 percent to 10.25 percent," the statement has read, explaining the reasons for the interest rate hike as follows:

'To restore disinflation, support price stability'

"Pandemic-related supply-side inflationary factors were expected to gradually phase out during the normalization process and demand-driven disinflationary effects were expected to become more prevalent.

"Yet, as a result of fast economic recovery with strong credit momentum, and financial market developments, inflation followed a higher-than-envisaged path. 

"The Committee assessed that the tightening steps taken since August should be reinforced in order to contain inflation expectations and risks to the inflation outlook.

"Accordingly, the Committee decided to increase the policy rate by 200 basis points to restore the disinflation process and support price stability."

'Although tourism revenues declined...'

The Committee has also shared the following observations about Turkey's economy amid the novel coronavirus (COVID-19) pandemic:

"Economic activity is recovering markedly in the third quarter owing to gradual steps towards normalization and the strong credit impulse.

"Recent monetary and fiscal measures that aim to contain negative effects of the pandemic on the Turkish economy contributed to financial stability and economic recovery by supporting the potential output of the economy.

"The normalization trend recently observed in commercial loans has started in consumer loans as well.

"The recent upturn in imports, which has resulted from deferred demand as well as pandemic-related liquidity and credit policies, is expected to moderate with the phasing out of these policy measures.

"Although tourism revenues declined due to the pandemic, easing of travel restrictions has started to contribute to a partial improvement.

"The 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."

The course of interest rates in Turkey

After Central Bank Governor Murat Çetinkaya was removed from office and Murat Uysal was appointed in his place, the Monetary Policy Committee took its first decision of interest rate cut in July 2019 and cut the policy rate from its current level of 24 percent to 19.75 percent.

After its meeting on September 12, 2019, the Monetary Policy Committee of the Central Bank lowered the policy rate to 16.50 percent. The Committee reduced the interest rate to 14 percent on October 24, to 12 percent on December 12 and to 11.25 percent on January 16.

On February 19, the Central Bank decreased the policy interest rate from 11.25 percent to 10.75 percent. In the meeting on March 17, the policy interest rate was reduced from 10.75 to 9.75 percent.

In its meeting on April 22, the Bank decreased the policy interest rate from 9.75 to 8.75 percent. On May 21, the interest rate was further reduced to 8.25 percent. The Bank kept this rate unchanged in June, July and August. (SD)