The Central Bank of the Republic of Turkey (CBRT) announced its first interest rate decision of the year. While the CBRT raised the policy rate to 45 percent in line with expectations, in the text of the decision, it gave the message that the level of monetary tightness necessary for disinflation has been reached and that this level will be maintained as long as necessary.
The Central Bank of the Republic of Turkey (CBRT), which raised the policy rate in line with expectations at the first meeting of the year, signaled the end of monetary tightening steps.
The Central Bank of the Republic of Turkey (CBRT) raised the policy rate to 45 percent.
Economists participating in the Bloomberg HT survey expected the policy rate to be increased by 250 basis points to 45 percent.
In the CBRT’s decision text, guidance on the monetary policy path stood out. In the text, the message was given that the necessary tightness level has been reached for the establishment of disinflation and that this tightness level will be maintained as long as necessary.
The following statements were used in the CBRT text:
In December, headline inflation recorded an increase consistent with the outlook presented in the last Inflation Report. The current level of domestic demand, rigidity in services prices and geopolitical risks keep inflation pressures alive. On the other hand, recent indicators suggest that the rebalancing in domestic demand is consistent with the envisaged disinflation process as the monetary tightening is reflected on financial conditions. The Committee assesses that the limited improvement in inflation expectations and pricing behavior continues. External financing conditions, the strengthening in reserves, the improvement in the current account balance and the demand for Turkish lira assets continue to contribute to exchange rate stability and the effectiveness of monetary policy. Accordingly, the underlying trend of monthly inflation continued to decline.
Taking into account the lagged effects of monetary tightening, the Committee assessed that the level of monetary tightness required for disinflation has been reached and will be maintained for as long as necessary. The Committee assessed that the current level of the policy rate will be maintained until the underlying trend of monthly inflation declines significantly and inflation expectations converge to the projected forecast range. In case of significant and persistent risks to the inflation outlook, monetary tightness will be reviewed.
The Committee is simplifying the existing micro- and macroprudential framework in a way to enhance the functionality of the market mechanism and strengthen macro financial stability. In line with the simplification process, the Committee will support the monetary transmission mechanism through macroprudential decisions despite possible volatility in credit supply and deposit rates. In addition to interest rate decisions, the Committee will continue with quantitative tightening by increasing the variety of sterilization tools to support the monetary tightening process.
Taking into account the lagged effects of monetary tightening, the Committee will continue to determine policy decisions in a way to provide the monetary and financial conditions that will bring the underlying trend of inflation down and achieve the 5 percent target in the medium term.