Turkey: Central Bank unexpectedly raises interest rate in September
At its 24 September meeting, the Central Bank’s Monetary Policy Committee (MPC) took market analysts by surprise and raised the one-week repo rate by 200 basis points to 10.25% from 8.25%. Market analysts had largely expected the Central Bank to stand pat, but the MPC instead delivered the first rate hike since the country’s currency crisis in 2018.
In deliberating the decision, the Bank took into account the higher-than-expected inflation readings and as such opted to tighten financial conditions in the market to cool price pressures. The MPC noted that it had expected “demand-driven disinflationary effects” as domestic demand has been weakened by the pandemic; however, the strong credit impulse and the fiscal and monetary policy action taken so far have fueled a robust economic recovery in the third quarter. This, in conjunction with continued lira weakness, put upside pressure on prices.
The move to aggressively hike the interest rate was likely also aimed at stemming the lira’s slide and appeasing international financial markets to an extent. On 23 September, the currency was down 4.7% month-on-month and 22.8% year-to-date against the U.S. dollar amid renewed geopolitical tensions with Greece in the Mediterranean. Moreover, in mid-September, Moody’s downgraded Turkey’s credit rating to B2 and maintained the negative outlook in part due to deteriorating government finances and the fact that the country’s institutions “appear to be unwilling […] to effectively address” increasing credit profile risks.
In the press release, the Bank struck a largely unchanged tone, reaffirming its belief that “a cautious monetary stance” is needed to sustain a disinflationary process.
The next monetary policy meeting is scheduled for 22 October.