The Central Bank of the Republic of Turkey (CBRT) has made a significant announcement regarding its interest rate decision for the month of September. The CBRT’s Monetary Policy Committee has taken the bold step of raising interest rates to 30%, marking a substantial increase of 500 basis points compared to the previous month. This decision aligns with the market’s expectation of a 30% interest rate increase following the CBRT’s move to raise rates by 750 basis points in August.
The CBRT’s decision to raise interest rates reflects its commitment to a monetary tightening policy aimed at achieving disinflation, anchoring inflation expectations, and addressing the challenges in pricing behavior. The months of July and August witnessed inflation levels exceeding expectations. Factors contributing to this included robust domestic demand, the persistence of price rigidity in the service sector, rising oil prices, and the continued deterioration of inflation expectations. These dynamics exerted additional upward pressure on inflation, leading to a forecast that inflation would likely remain near the upper limit of the projected range in the Inflation Report by year-end.
The CBRT recognizes the significant impact of recent cost pressures related to wages and exchange rates, as well as tax regulations, on inflation. However, it anticipates a gradual decline in the main trend of monthly inflation. To this end, the CBRT is committed to achieving disinflation in line with the path outlined in its Report for the year 2024, leveraging monetary tightening measures.
CBRT Raises Interest Rates to 30% in Ongoing Battle Against Inflation
Several factors are expected to contribute to price stability in Turkey, including increased foreign direct investments, improved external financing conditions, a continued rise in reserves, support from tourism revenues for the current account, and growing domestic and international demand for Turkish lira assets.
The policy rate will be determined to create monetary and financial conditions conducive to reducing the primary inflation trend and reaching the medium-term target of 5%. The process of monetary tightening will be gradually reinforced as necessary to bring about a significant improvement in the inflation outlook.
The CBRT is also working on simplifying the existing micro- and macroprudential framework to enhance market mechanisms’ functionality and strengthen macro-financial stability. This simplification will be carried out progressively, taking into account impact analyses. As part of this effort, regulations aimed at increasing the share of Turkish lira deposits will be introduced to bolster the effectiveness of the monetary transmission mechanism. In addition to raising interest rates, the CBRT will continue to make judicious decisions regarding selective credit and quantitative tightening to support the ongoing monetary tightening process.
CBRT’s Commitment to Achieving Price Stability Through Interest Rate Hike and Economic Measures
The CBRT underscores its commitment to closely monitoring inflation indicators and the primary inflation trend. It emphasizes its unwavering determination to employ all available tools to achieve its primary objective of maintaining price stability.
The CBRT will maintain a consistent and predictable approach in making future decisions.