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CBRT Raises Key Policy Rate to 25% in Ongoing Inflation Battle

The Central Bank of the Republic of Türkiye (CBRT) has taken a bold step in its ongoing fight against inflation. In its latest move, the CBRT increased its key policy rate, known as the one-week repo rate, by a substantial 750 basis points, elevating it from 17.5% to 25%. This decision aligns with the central bank’s commitment to a tightening process aimed at curbing inflation.

The Monetary Policy Committee (MPC) of the CBRT remains resolute in its determination to tackle inflation and reinforce macro-financial stability. Recent economic indicators have highlighted a persistent upward trajectory in the core inflation trend, prompting this proactive approach by the central bank.

“The strong course of domestic demand, cost pressures stemming from wages and exchange rates, stickiness of services inflation, and tax regulations have been the main drivers behind the inflationary pressures,” the CBRT stated in a release.

This rate hike is part of the CBRT’s broader simplification strategy, which will continue in a gradual manner. Earlier this year, in the first meeting under the leadership of its new governor, Hafize Gaye Erkan, the central bank raised the policy rate by 650 basis points to 15%. Subsequently, it increased it by another 250 basis points to 17.5% last month.

These decisions reflect a shifting economic policy landscape in Türkiye. President Recep Tayyip Erdoğan, after securing another five-year term in May, initiated significant changes in his economic administration. Notably, respected veteran Mehmet Şimşek was appointed as the new economy minister, and Gaye Erkan, a former senior U.S.-based bank executive, assumed the role of central bank governor. These appointments signaled a shift towards a tighter interest rate policy.

Economists and analysts had anticipated the rate hike. According to a survey conducted by Anadolu Agency (AA), experts expected an increase ranging from 100 to 250 basis points, with policy rate expectations varying from 18.50% to 20.00%. Meanwhile, a Reuters poll involving 17 institutions predicted a 250-basis-point hike in the policy rate to 20%, with forecasts ranging from 18% to 20.50%.

The CBRT has not only adjusted its policy rates but has also embarked on a simplification of macro-prudential measures. Additionally, it has complemented rate hikes with qualitative and selective credit tightening measures to combat inflation. In a recent development, the CBRT lifted certain targets applied to banks concerning the conversion of foreign exchange deposits to the lira-protection scheme, known as KKM.

The central bank has pledged to determine the policy rate in a manner that fosters the necessary monetary and financial conditions for reducing the underlying inflation trend. The CBRT remains committed to further tightening, promising to do so “as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved.”

Furthermore, the CBRT is optimistic about several factors that will contribute to price stability, including foreign direct investment, improvements in external financing conditions, the continuous growth of foreign exchange reserves, and the positive impact of tourism revenues on the current account balance.

In response to the rate hike, Minister Şimşek emphasized, “We are determined, price stability is our top priority.”

The annual inflation rate, measured by the consumer price index (CPI), had reached a concerning 85% in October last year, a 25-year high. Although it temporarily lowered to 38.21% in June, recent developments, including the depreciation of the lira and tax hikes, pushed it back up to nearly 48% last month. Officials acknowledge that it could continue to rise towards the end of the year.

 

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  • Author: Gunel Musa

Public Relations Manager

04.09.2023
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