MNI CBRT WATCH: Turkey CenBank Raises All Three Interest Rates

The Central Bank of the Republic of Turkey raised the key 1W repo rate from 42.5% to 46% on Thursday, and at the same time hiked the overnight lending rate from 46% to 49% and the overnight borrowing rate from 41% to 44.5%. (See MNI EM CBRT WATCH: Hold Seen, But Hawkish Surprise Possible)

The hikes, which had been expected to be at least discussed, were prompted by the partial reversal of March’s decline in underlying inflation, as April saw core goods prices rise due to financial market developments. (See MNI EM INTERVIEW: CBRT Keen To Avoid Hike, Government Row-Yalcin)

Leading indicators also suggest domestic demand will exceed projections this month, despite some loss of momentum in the first quarter, suggesting a lower disinflationary impact, the CBRT said in a statement. 

Services inflation is seen remaining relatively flat, and the CBRT is “closely monitoring” the potential effects of rising protectionism on the disinflation process through global economic activity, commodity prices and capital flows.

There was no direct mention in the statement of recent moves to defend the lira following its rapid depreciation after last month's arrest of a leading political opposition figure. Instead, it repeated the assertion that monetary policy tightening is strengthening the disinflation process through moderation in domestic demand, real appreciation in the Turkish lira, and improving inflation expectations.

The Monetary Policy Committee reiterated that inflation expectations and pricing behaviour continue to pose risks to the disinflation process, and that it will continue to adjust the policy rate predictably, prudently, and on a data-driven, meeting-by-meeting basis.