Turkish Central Bank surprisingly increases interest rate to 50 pct

The Central Bank of Turkey unexpectedly raised its policy interest rate to 50 percent by 500 basis points, citing "deterioration in the inflation outlook."

Duvar English

The Turkish Central Bank’s Monetary Policy Committee (MPC) on March 21 decided to increase the policy rate, known as the one-week repo auction rate, from 45 percent to 50 percent. 

After raising interest rates to 45 percent in January, the Central Bank kept the rate unchanged at 45 percent in the February meeting.

The MPC has also made adjustments to the monetary policy operational framework by setting the Central Bank overnight borrowing and lending rates 300 basis points below and above the one-week repo auction rate, respectively.

Turkey's "real yields" trends compare to other countries (Reuters Graphics).

The banks stated that the monthly inflation was higher than expected in February due to “stickiness in services inflation,” as well as the “wage increases.”

The unexpected 500 basis point hike was implemented “in response to the deterioration in the inflation outlook,” according to the bank.

The depreciation of Turkish lira (Reuters Graphics).

Most economists had predicted that the central bank would refrain from further increasing policy rates, especially with the country's local elections just 10 days away and facing considerable pressure from President Recep Tayyip Erdoğan.

The bank noted that tight monetary stance would be sustained “until a significant and sustained decline in the underlying trend of monthly inflation is observed.”

The bank defended various levers to tighten liquidity in the banking system such as block on portions of lenders' lira required reserves and reducing the limits of installments on cash advances during March. 

Turkey's credit squeeze trajectory (Reuters Graphics).

Because of the "lagged effects of monetary tightening," the bank emphasized its commitment to continue implementing similar policies until reaching its medium-term inflation target of five percent.

Following the interest rate decision, the dollar exchange rate, which started the day at 32.41 lira, dropped to 31.96 lira by 14:30, but shortly after returned to the similar levels.