Turkey’s Central Bank Lifts Key Rates Drastically

In a bid to bolster the Turkish lira, the central bank lifted its key rates drastically, as expected, on Thursday under the new governorship.

At the first policy meeting of Naci Agbal as governor of the Central Bank of the Republic of Turkey, the Monetary Policy Committee raised the key one-week repo rate sharply by 475 basis points to 10.25 percent from 15.00 percent.

All central bank funding will be provided through the one-week repo rate, the bank said.

Early November, President Recep Tayyip Erdogan replaced TCMB Governor Murat Uysal with former finance minister Agbal after the Turkish lira fell to a record low this year.

The latest hike was the sharpest in more than two years. In September, the bank had raised the rate from 8.25 percent, which was the first increase in two years.

The decision to hike its one-week repo rate by 475 basis points and pledge to provide all funding through this facility appears to have done enough to convince investors that there really is a positive shift in policymaking underway, Jason Tuvey, an economist at Capital Economics, said.

The economist expects the repo rate to be left at 15 percent until at least the end of 2021.

The bank said the lagged effects of depreciation in Turkish lira, increasing international food prices and deterioration in inflation expectations affect the inflation outlook adversely.

The committee 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, the bank said in the statement.

Moreover, the bank said the tightness of monetary policy will be decisively sustained until a permanent fall in inflation is achieved.

The bank said it will attain the main objective of achieving and maintaining price stability by adopting transparency, predictability and accountability principles of the inflation targeting regime.

The committee noted that partial restrictions to curb the Covid-19 spread heightened uncertainties on the short-run outlook of economic activity.

Besides, strengthening domestic demand, due to the lagged effects of strong credit impulse during the pandemic, affects the current account balance adversely through the imports channel, the bank added.

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