Investing.com – CBRT increased the one-week repo auction rate, which was used as the policy rate at the 3rd MPC meeting of the year, by 200bp to 19%. The interest rate was increased above market expectations and the following statements were made in the decision text:
The Monetary Policy Committee (the Committee) has decided to increase the policy rate, which is the one-week repo rate, from 17 percent to 19 percent.
With the effect of expansionary monetary and fiscal policies and positive developments in the vaccination process, there is an improvement in the global growth outlook and an increase in international commodity prices. Rising global inflation expectations cause uncertainties regarding the monetary policies of developed countries and volatility in global financial markets.
Economic activity is following a strong course. Economic activity is expected to increase in services and related sectors as the constraints due to the epidemic are eased. However, depending on the possible developments regarding the course of the epidemic, risks on economic activity remain important. In addition to the strong domestic demand due to the cumulative effects of the high credit growth achieved during the epidemic period, increases in import prices continue to affect the current account balance negatively. On the other hand, loan growth, which has slowed down due to the tightening in financial conditions, has displayed an upward trend recently.
Domestic demand conditions, cumulative cost effects, especially the exchange rate, the rise in international food and other commodity prices, and high levels of inflation expectations continue to adversely affect pricing behavior and inflation outlook. On the other hand, wage and administered price adjustments due to supply constraints in some sectors maintain their importance on the medium-term inflation outlook. Although the expectation that the slowing effects of the monetary tightening on loans and domestic demand will become more pronounced, the recent upward trend in credit growth and the increase in imported costs delay the gradual improvement in demand and cost factors.
Considering the upside risks posed by these developments on inflation expectations, pricing behavior and the medium-term inflation outlook, the Committee has decided to implement a strong additional front-loaded monetary tightening.
Considering the 2021 year-end forecast target, the tight monetary policy stance will be resolutely maintained for a long time until strong indicators are formed that point to a permanent fall in inflation and price stability. Within the scope of strong indicators that point to a permanent decline in inflation and price stability, the underlying trend of inflation and indicators of pricing behavior, diffusion indices, demand and cost factors and inflation expectations will continue to be closely monitored with the targets within the forecast horizon. If necessary, additional monetary tightening will be made.
Until a permanent price stability and 5 percent target is reached, the balance between monetary policy interest rate and actual / expected inflation will be resolutely maintained in a way to maintain a strong disinflationary effect. It has been assessed that maintaining the tight monetary policy stance in this way will not only establish price stability permanently, but also positively affect macroeconomic and financial stability through the decline in country risk premiums, the onset of reverse currency substitution, an increasing trend in foreign exchange reserves and a permanent decline in financing costs.
The CBRT adopts an analysis framework based on all factors affecting inflation and their interaction with a medium-term perspective in its decision-making processes. It should be emphasized that any new data and news to be announced may cause the Board to change its policy stance towards the future. “
CBRT, which increased the policy rate to 17% by increasing the interest rate by 200 bp in December, in the text of the decision:Considering the 2021 year-end forecast target, it has decided to make a strong monetary tightening in order to eliminate the risks regarding the inflation outlook, to bring inflation expectations under control and to restore the disinflation process as soon as possible. “ had included his statement.
The center, which kept the interest fixed in January, “Considering the 2021 year-end forecast target, the tight monetary policy stance will be resolved until strong indicators are formed that point to a permanent decline in inflation and price stability. to continue for a long time has decided. If necessary, additional monetary tightening will be made. “ added the statement.
The bank, which kept the interest rate constant in February, also emphasized the 5% inflation target in addition to using the statements in January. “Until a permanent price stability and 5 percent target is reached, the balance between monetary policy rate and actual / expected inflation will be resolutely maintained in a way that maintains the strong disinflationary effect.” gave place to his statement. With this statement, it was pointed out that the movement in inflation will be a determinant in interest.
After the last MPC meeting, inflation increased from 14.97% to 15.61%, and the interest-inflation spread, which the center stated in the text, narrowed, and the exchange rate increased from 6.90 to 7.50 after the last MPC meeting. ) on the rise. Considering the lagged effect of the rise in the exchange rate, the center was expected to increase interest rates by at least 100 bp in this month’s meeting. The center raised interest rates ahead of expectations.
After the exchange rate, which was traded at 7.46 before the decision, it fell to 7.34 level as the first reaction.
Author: Necdet Erginsoy