The Central Bank of the Republic of Turkey (CBRT) raised its repo rate by 50 basis points in November last year and was widely expected to raise it further today in light of a continued depreciation of the exchange rate of the lira due to the fallout from last year's failed military coup and concern over the independence of the central bank in the face of political pressure for rate cuts.
The lira weakened by almost 1 percent to 3.78 to the U.S. dollar in an immediate response to the central bank's limited tightening measures to be down almost 6 percent since the start of this year. Since the start of 2016 the lira has depreciated 22 percent.
"Excessive fluctuations in exchange rates since the previous meeting have increased the upside risks regarding the inflation outlook," the CBRT said.
Turkey's inflation rate rose to 8.53 percent in December from 7.0 percent in November and the CBRT said it expects the "significant" rise in inflation to continue in the short term due to the lagged effect of higher import prices on consumer prices.
It added that it would take "necessary liquidity measures" in the event of "unhealthy" behavior in the foreign exchange market.
In today's move the CBRT raised its overnight funding rate by 75 basis points to 9.25 percent and the late liquidity lending rate by 100 basis points to 11.0 percent. The overnight borrowing rate was left at 7.25 percent and the late liquidity borrowing rate at 0 percent.
Prior to the election of Donald Trump as U.S. President in November, the central bank had been slowly lowering the overnight funding rate by 250 basis points since March 2016 as inflation had been decelerating amidst the bank's effort to simplify its rate structure.
But amidst a general weakening of emerging market currencies following the U.S. election, the CBRT in November raised its key repo rate in the first change to this rate since February 2015.
The Central Bank of the Republic of Turkey issued the following statement:
"The Monetary Policy Committee (the Committee) has decided to set the short term interest rates at the following levels:
a) Overnight Interest Rates: Marginal Funding Rate has been increased from 8.5 percent to 9.25 percent and borrowing rate has been kept at 7.25 percent.
b) One-week repo rate has been kept at 8 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate has been kept at 0 percent, and lending rate has been increased from 10 percent to 11 percent.
Recently released data indicate a partial recovery in the economic activity. Demand from the European Union economies continues to contribute positively to exports, while domestic demand displays a weaker course. With the supportive measures and incentives provided recently, the recovery in the economic activity is expected to continue at a moderate pace. The Committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly.
Aggregate demand developments support disinflation. Yet, excessive fluctuations in exchange rates since the previous meeting have increased the upside risks regarding the inflation outlook. The significant rise in inflation is expected to continue in the short term due to lagged pass-through effects and the volatility in food prices. Accordingly, the Committee decided to strengthen the monetary tightening in order to contain the deterioration in the inflation outlook.
The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Future monetary policy decisions will be conditional on the inflation outlook. Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered. Moreover, necessary liquidity measures will be taken in case of unhealthy pricing behavior in the foreign exchange market that cannot be justified by economic fundamentals.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days."