Turkish Central Bank cuts benchmark rate to 14%, in line with expectations

ANKARA

The Turkish Central Bank on Thursday cut its benchmark one-week repo rate by 100 basis points from 15% to 14% in line with market expectations.

With the latest cut, the monetary authority has lowered the key rate by 500 basis points since September.

In previous statements, the bank signaled it would reduce rates one more time, this month, before stopping in January.

"Increase in inflation in November has been driven by developments in exchange rates and supply-side factors such as the rise in global food and agricultural commodity prices, supply constraints," said the bank, noting inflationary pressures.

The bank also said it made a decision to "complete the use of the limited room implied by transitory effects of supply-side factors and other factors beyond monetary policy’s control on price increases."

Bank's emphasis on current account balance

Citing national income data and leading indicators, the bank also stressed that economic activity is robust thanks to strong external demand.

It also said Turkey’s rapid vaccination rollout this year paved the way for services, tourism, and related sectors to enable a more balanced composition of economic activity.

It said the current account balance is projected to see a surplus in 2022 on the back of the upward trend in exports.

"Strengthening of the improvement trend in the current account balance is important for price stability objective, and in that respect, developments in commercial and consumer loans are closely monitored," it said.

The bank also stressed it will track policy decisions in the first quarter of 2022, adding: "All aspects of the policy framework will be reassessed in order to create a foundation for a sustainable price stability."

In November Turkey saw an annual increase of 21.31% in consumer prices, while the bank has maintained its medium-term 5% inflation target.

The bank has intervened in foreign exchange markets four times this month by selling dollars, citing "unhealthy price formations."

With the latest intervention, the total amount of the bank's FX markets intervention rose to approximately $4 billion.

President's opposition to high interest rates

Though the Central Bank is an independent intuition, its recent interest rate cuts have been in line with President Recep Tayyip Erdogan’s oft-stated opposition to higher interest rates, with the mantra: "We will remove the interest rate burden from the backs of our people.”

He previously said there was “no turning back” from the new policy direction, one he pledged would free the country from the “trap” of exchange rates, inflation, and interest rates.

Affirming an economic model based on lower interest rates, Erdogan has argued that high borrowing costs "demolish” domestic production and make structural inflation permanent by raising production costs.