Turkish central bank holds rates steady in line with expectations

ISTANBUL: The Turkish central bank kept Thursday its key policy rate, also known as the one-week repo auction rate, constant at 50% in line with market expectations citing an underlying trend of monthly inflation, which it said registered a limited decline in April.

The Central Bank of the Republic of Türkiye (CBRT) left the rate unchanged for the second month in a row after surprising with a 500 basis points hike in March, before nationwide local elections.

The bank’s monetary policy committee said it had decided to keep the policy rate constant at 50% but that it remains highly attentive to inflation risks.

The annual inflation rate, as measured in the consumer price index (CPI), edged up to 69.8% in April, up from 68.5% in March, according to official data published in early May. The policymakers foresee inflation peaking this month likely at 75%-76% before falling to 38% at year-end, according to the CBRT forecast.

“The underlying trend of monthly inflation registered a limited decline in April. Recent indicators point to a slowdown in domestic demand compared to the first quarter,” the central bank said in a statement.

The bank, however, said that consumption goods imports increased in April, adding, “In addition to the high level of and the stickiness in services inflation, inflation expectations, geopolitical risks and food prices keep inflationary pressures alive.”

“The Committee closely monitors the alignment of inflation expectations and pricing behavior with projections,” it added.

“Considering the lagged effects of the monetary tightening, the Committee decided to keep the policy rate unchanged but reiterated that it remains highly attentive to inflation risks.”

Speaking at the International Arab Banking Summit in Istanbul on Thursday, Treasury and Finance Minister Mehmet Şimşek reiterated the decisiveness to bring the inflation down.

Earlier this month, the government unveiled a comprehensive savings plan in a bid to tackle soaring inflation and enhance efficiency within the public sector, prioritizing only essential state investment projects in the latest major move to instill confidence in an economic tightening program.

Türkiye last year walked away from a period of lower interest rates as the new economic administration embarked on the long tightening drive that moved the key policy rate from 8.5% to 50%.

“Inflation is high but will fall; we have developed a disinflation program for this. We are now in a one-year transition period and the disinflation process has already started,” Anadolu Agency (AA) quoted Şimşek as saying.

The officials earlier conveyed the expectations that starting in the summer months, inflation would begin declining.

Economists from Reuters to Bloomberg unanimously predicted that the central bank would keep interest rates unchanged at 50% in May.

“The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed, and inflation expectations converge to the projected forecast range,” the central bank said.

The bank also said it terminated the securities maintenance practice to simplify the macroprudential framework and enhance the functionality of the market mechanism.

It pledged to take additional steps to preserve the macro-financial stability and to support the monetary transmission mechanism thanks to the developments in credit growth and deposits.

The excess liquidity stemming from the surging domestic and foreign demand for Turkish lira financial assets will be sterilized through additional measures, read the statement.

“Indicators of inflation and underlying trend of inflation will be closely monitored and the Committee will decisively use all the tools at its disposal in line with its main objective of price stability,” the central bank pledged.

Courtesy: Dailysabah