Today's rate hike comes 11 days after the Central Bank of the Republic of Turkey (CBRT) simplified its framework for monetary operations by returning to its one-week repo rate as its main rate for signaling the monetary policy stance, replacing a system used in the last few years of five different rates that tended to blur its intentions.
The CBRT has now raised its key rate by 975 basis points in less than 2 weeks and traders immediately pushed up the exchange rate of the lira by 2.2 percent to 4.48 against the U.S. dollar, signaling their approval of the central bank's move to assets its independence and credibility.
The lira had come under sustained pressure, and is still more than 15 percent lower than at the start of this year, after statements by President Tayyip Erdogan - who lauds himself as an enemy of interest rates - that he would exert greater control over the central bank if he wins the presidential elections on June 24.
After days of high-level discussions, the central bank on May 23 raised its late liquidity lending rate by 300 basis points at an extraordinary meeting of its monetary policy committee and then on May 28 announced the change in its operational framework.
This was followed by meetings in London between major investors, the central bank governor and the deputy prime minister, which appeared to restore some calm to capital flows.
Today's rate hike at the regularly scheduled committee meeting was widely expected by analysts following news this week that inflation jumped to 12.15 percent in May from 10.85 percent, putting pressure on Turkish assets.
"The Central Bank will continue to use all available instruments in pursuit of the price stability objective," the CBRT said, adding that it is closely monitoring inflation expectations, the behavior of prices and other factors that affect inflation and will tighten monetary policy further if needed.
"A tight stance in monetary policy will be maintained decisively until the inflation outlook displays a significant improvement," it added.
The Central Bank of the Republic of Turkey issued the following statement:
"The Monetary Policy Committee (the Committee) has decided to increase the policy rate (one week repo auction rate) from 16.5 percent to 17.75 percent.
Recently released data indicate a rebalancing trend in the economic activity. External demand maintains its strength, while domestic demand displays a more moderate course.
Cost factors have been the main driver of the recent upsurge in inflation. On the other hand, price increases have shown a generalized pattern across subsectors. Despite the mild outlook for demand conditions, elevated levels of inflation and inflation expectations continue to pose risks on the pricing behavior. Accordingly, the Committee decided to further strengthen the monetary tightening to support price stability.
The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Tight stance in monetary policy will be maintained decisively until inflation outlook displays a significant improvement. Inflation expectations, pricing behavior and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.
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."
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