Turkey's central bank sharply hikes key policy rate to 19%

Turkey's central bank sharply hikes key policy rate to 19%

Turkey’s central bank on Thursday hiked its benchmark policy rate by 200 basis points to 19%, twice the market forecast in what it called a “front-loaded” move to head off rising inflation and support the Turkish lira, Trend reports citing Daily Sabah.

In a statement following its monthly policy committee meeting, the Central Bank of the Republic of Turkey (CBRT) repeated that a tight policy stance would be decisively maintained for an extended period and that additional monetary tightening will be delivered if needed.

The bank "decided to implement a front-loaded and strong additional monetary tightening," the bank said.

The lira responded with a more than a 2% jump against the U.S. dollar to 7.36, its strongest level in two weeks.

The decision had been seen as a test of CBRT Governor Naci Ağbal’s battle against inflation and his hawkish rhetoric.

Analysts said he more than passed the credibility test, clearing the way to higher rates for longer than expected as the major emerging market (EM) economy rebounds from the coronavirus pandemic.

“Ağbal is clearly keen to embellish his inflation-fighting credentials and thus was willing to go above and beyond what investors had demanded,” said Jason Tuvey, senior EM economist at Capital Economics.

The bank was expected to hike the key one-week repo rate by as much as 100 basis points. Market expectations for a hike rose this month after U.S. bond yields jumped, the lira fell and inflation surged more than expected to nearly 16% last month.

In a Reuters poll, almost all of the 21 economists expected a 100-point rate hike. The median estimate in an Anadolu Agency (AA) survey was also for a rise of 100 points.

The key one-week repo rate is the highest of any big economy, and it is back to levels last touched in mid-2019. It had stood at 17% since December after aggressive monetary tightening last year.

The bank’s policy committee said it “decided to implement a front-loaded and strong additional monetary tightening.” It again promised a tight stance would be held “decisively” for an extended period and promised more rate hikes if needed.

The central bank has now tightened policy by 875 basis points since President Recep Tayyip Erdoğan appointed Ağbal as CBRT governor in November.

Erdoğan had acknowledged that even “bitter” policies would be needed to lower inflation, and he repeated that aim last week.

Ağbal has promised more tightening if needed. The lira had rallied 20% after the appointment.

“Exceeding (market) expectations was definitely the most efficient way to encourage foreign investors to restore their bullish bets on the lira,” said Piotr Matys, senior emerging markets forex strategist at Rabobank.

“With the policy rate at 19%, the Turkish Lira is one of the most attractive high-yielding EM currencies, not only in nominal terms but also its attractiveness in real terms should increase in the coming months when inflation starts falling,” Matys told Reuters.

Rate cuts are expected in the second half of the year when inflation should dip. The annual inflation is up to mid-2019 levels and has been the main issue for the economy. The government has particularly vowed to fight against the rise in consumer prices.

Rising energy prices and higher demand as lockdowns are eased have driven price rises. Still, inflation is within the central bank’s forecast range and Ağbal said it will hit the 5% target by the end of 2023.

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