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Turkey Monetary Policy November 2020

Turkey: Central Bank delivers biggest interest rate hike in over two years; shifts to more conventional policy stance

In the first meeting under the new governorship of Naci Agbal on 19 November, the Monetary Policy Committee (MPC) of the Central Bank of Turkey hiked the one-week repo rate from 10.25% to 15.00%. The drastic rise, which was the largest since June 2018, was in line with analysts’ expectations. Moreover, the Central Bank moved all funding back to the benchmark rate from the late liquidity window, signaling a return to more transparent and orthodox policy, which should boost investor confidence.

The decision was taken to cool price pressures and strengthen the country’s currency—which had lost 22.8% of its value year-to-date on 18 November. Price pressures have been sticky, in part fueled by the depreciating lira, with inflation reaching 11.9% in October. Moreover, the Bank stated that it expects inflation to rise further in November, in part due to the lagged effects of currency depreciation. Therefore, the MPC noted that it had “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 press release, the Bank struct a markedly more hawkish tone compared to its prior meeting. The MPC stated that “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”. As such, further rate hikes can be expected if inflation remains elevated. Moreover, the decision should restore some credibility and predictability at least in the short run, and this should help to rebuild foreign-exchange reserves. However, the objective of reversing the dollarization trend could be harder to achieve.

The next monetary policy meeting is scheduled for 24 December.

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