Central bank announces highly anticipated interest rate decision ​

Türkiye’s Central Bank increases the policy rate by 250 basis points to 45% meanwhile signalling that the necessary level of monetary tightness to achieve disinflation has been reached

Announcing the highly anticipated interest rate decision, the Central Bank of the Republic of Türkiye continued to increase interest rates in the new year. Raising the interest rate for the eighth consecutive time, the bank increased the policy rate by 250 basis points from 42.5% to 45%.

“The board decided to increase the one-week repo auction interest rate, which is the policy rate, from 42.5% to 45%,” the bank stated.

Market expectations remain unchanged

The Central Bank of the Republic of Türkiye, which increased the interest rate to 45%, made a move parallel to the market. The expectation of both economists and banks around the world regarding the bank’s interest rate decision was generally for a 250 basis point increase.

In June, when Hafize Gaye Erkan took office, the interest rate increased by 650 basis points from 8.5% to 15%. Subsequently, in July, the interest rate rose by 250 basis points to 17.5%, followed by an increase of 750 basis points to 25% in August, 500 basis points to 30% in September, 500 basis points to 35% in October, and another 500 basis points to 35% in November. However, there was a reduction to 40% in December, followed by a further reduction to 42.5% with an increase of 250 basis points. With an additional 250 basis point increase in January, the interest rate witnessed a total increase of 3,650 basis points over the eight-month period.

The Central Bank said in a statement: “In December, headline inflation increased in line with the outlook presented in the last Inflation Report. The current level of domestic demand, the rigidity in service prices and geopolitical risks keep inflation pressures alive. On the other hand, near-term indicators show that domestic demand will decrease as monetary tightening is reflected in financial conditions. It indicates that the rebalancing is consistent with the envisaged disinflation process. The board evaluates that the limited improvement in inflation expectations and pricing behavior continues. External financing conditions, the strengthening of reserves, the improvement in the current account balance and the demand for Turkish lira assets contribute to exchange rate stability and the effectiveness of monetary policy. In this context, the underlying trend of monthly inflation continued to decline.”

Optimal monetary tightness attained

Considering the delayed effects of monetary tightening, central bank has assessed that the necessary level of monetary tightness to achieve disinflation has been reached and will be sustained for as long as needed. The bank further determined that the existing policy rate will be upheld until a substantial decline in the underlying trend of monthly inflation occurs and inflation expectations align with the forecasted range. However, in the event of notable and enduring risks to the inflation outlook, a reevaluation of monetary tightness will be conducted.

Continuation of quantitative tightening

The central bank is streamlining the current micro- and macroprudential framework to enhance the efficiency of the market mechanism and bolster macro-financial stability. As part of this simplification initiative, the bank will back the monetary transmission mechanism with macroprudential decisions, even in the face of potential fluctuations in loan supply and deposit interest rates. Alongside interest rate determinations, the Board will persist in quantitative tightening, expanding the array of sterilization tools employed to reinforce the monetary tightening process.

Central bank will continue to utilize all available tools

The bank remains committed to shaping policy decisions in a manner aimed at fostering monetary and financial conditions conducive to mitigating the predominant inflationary trends, ultimately striving to achieve the 5% target over the medium term. This approach takes into careful consideration the delayed impacts of monetary tightening.

Vigilant scrutiny of indicators related to inflation and its core trajectory will persist, and the bank will use all available tools with determination, aligning with the overarching objective of maintaining price stability. In adhering to a principled approach, the Board will continue to base its decisions on a predictable, data-driven, and transparent framework.

Furthermore, a summary of the Monetary Policy Committee Meeting will be promptly published within five business days, enhancing transparency and communication with stakeholders.