Turkey Central Bank Hikes Rates Unexpectedly

Turkey’s central bank lifted its interest rates unexpectedly by 200 basis points in an attempt to curb the weakness in the lira exchange rate.

The Monetary Policy Committee of the Central Bank of the Republic of Turkey, led by Governor Murat Uysal, decided to lift the policy rate, which is the one-week repo auction rate, to 10.25 percent from 8.25 percent.

This was the first hike in two years. The bank had reduced the rate four times this year by a cumulative 375 basis points.

“As a result of fast economic recovery with strong credit momentum, and financial market developments inflation followed a higher-than-envisaged path,” the bank said.

Policymakers said the tightening measures taken since August should be reinforced to contain inflation expectations and risks to the inflation outlook. The committee assessed that the rate increase is needed to restore the disinflation process and support price stability.

The move gives the central bank more room to tighten monetary conditions through its interest rate ‘corridor’ and the average cost of central bank liquidity provision is likely to climb to around 12 percent by year-end from the current 10.7 percent, Jason Tuvey, an economist at Capital Economics, said.

The real test, of course, is whether the central bank backs up today’s decision with further steps to improve its policymaking credibility, the economist observed.
Additional tightening at the next few meetings, with a pledge to stick to a single policy rate and a commitment to keep real interest rates positive for a prolonged period, would be ideal.

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