CBRT raises policy rate by 500 basis points to 40 percent, exceeding expectations

The interest rate decision, which markets were eagerly awaiting, has been announced.

The CBRT Monetary Policy Committee raised the policy rate by 500 basis points to 40 percent at its regular November meeting.

The CBRT had previously raised interest rates by a total of 2,650 basis points over five meetings, with 650 in June, 250 in July, 750 in August, and 500 each in September and October. With this latest increase, the total interest rate hike has reached 3,150 basis points. In other words, the interest rate has increased by 31.5 points in 6 months.

WHAT WERE ECONOMISTS EXPECTING?

Economists participating in the AA Finance expectation survey had predicted that the policy rate would be raised by 250 basis points to 37.5 percent.

CENTRAL BANK'S DECISION TEXT

The following statements were included in the Central Bank Monetary Policy decision text:

"Headline inflation, which declined slightly in October, is in line with the outlook presented in the latest Inflation Report. The current level of domestic demand, stickiness in services prices, and geopolitical risks keep inflation pressures alive. On the other hand, recent indicators point to the beginning of a rebalancing in domestic demand as monetary tightening reflects on financial conditions. The Committee also assesses that a limited improvement in inflation expectations and pricing behavior has begun. The improvement in external financing conditions, the continued increase in reserves, the support of the rebalancing in demand to the current account, and the increase in domestic and foreign demand for Turkish lira assets contribute strongly to exchange rate stability and the effectiveness of monetary policy. In this context, a decline is observed in the underlying trend of monthly inflation.

The Committee has assessed that the level of monetary tightness required to establish disinflation has been significantly approached. In this context, the pace of monetary tightening will be slowed down and the tightening steps will be completed in a short period of time. It has been assessed that the monetary tightness required for the permanent establishment of price stability will be maintained as long as necessary.

The Committee is simplifying the current micro- and macroprudential framework in a way that will increase the functionality of market mechanisms and strengthen macro-financial stability. While it is assessed that loan interest rates are consistent with the targeted level of financial tightness, it is anticipated that the regulations aimed at increasing the share of Turkish lira deposits and monetary tightening will continue to strengthen the transmission mechanism and improve the funding composition of the banking system. In addition to interest rate decisions, the Committee will continue to take quantitative tightening decisions to support the monetary tightening process.

The Committee will continue to determine its policy decisions in a way that will provide the monetary and financial conditions that will reduce the underlying trend of inflation and reach the 5 percent target in the medium term, taking into account the cumulative and delayed effects of monetary tightening.

Indicators regarding inflation and the underlying trend of inflation will be closely monitored, and the Committee will continue to use all tools at its disposal decisively in line with its main objective of price stability."

INTEREST RATE HIKES BEGAN IN JUNE

The Central Bank has been tightening monetary policy since its meeting in June.

The Central Bank ended its easing cycle after 27 months by taking an upward step in interest rates at the June meeting.

The committee, which held its first meeting in June under the leadership of the new governor Hafize Gaye Erkan, had raised the policy rate by 6.5 points to 15 percent.

The Central Bank raised the policy rate by 2.5 points to 17.50 percent at its July meeting.

Continuing the interest rate hikes at the August meeting, the Central Bank raised the rate to 25 percent with a 7.5-point increase.

At the September meeting, the policy rate was raised by 500 basis points from 25 percent to 30 percent.

Continuing the interest rate hikes in October, the Central Bank raised the rate to 35 percent with another 500-basis-point increase.

News Source: 12punto