The Central Bank of Turkey announced a surprising move by raising the one-week repo auction rate (policy rate) by a substantial 500 basis points, elevating it from 35% to 40%. This decision exceeded the anticipated increase of 250 basis points and led to further strengthening of the Turkish lira.
Although headline inflation slightly decreased in October and aligned with the projections in the recent Inflation Report, persistent domestic demand, services inflation, and geopolitical risks are still contributing to inflationary pressures. On a positive note, recent indicators suggest a moderation in domestic demand due to the impact of monetary tightening on financial conditions.
The Central Bank noted improvements in inflation expectations and pricing behavior, as well as positive external factors such as enhanced financing conditions and increased demand for Turkish lira-denominated assets. Consequently, the Committee observed a decline in the underlying trend of monthly inflation.
The Central Bank emphasized that the current level of monetary tightness is close to what is necessary to achieve the desired disinflation. As a result, the pace of monetary tightening will slow down, and the tightening cycle is expected to conclude shortly. The commitment to maintaining monetary tightness remains until sustained price stability is ensured.
To enhance market mechanisms and bolster macro-financial stability, the Committee continues efforts to simplify and improve the existing micro- and macroprudential framework. While lending rates are deemed consistent with the targeted financial tightness, regulations aimed at increasing the share of Turkish lira deposits will persist to strengthen the transmission mechanism and improve the funding composition of the banking system.
Beyond policy rate decisions, the Committee will continue to implement quantitative tightening measures to support the overall monetary policy stance. Considering the cumulative and delayed effects of monetary tightening, the Committee will determine policy decisions with the aim of creating the necessary monetary and financial conditions to achieve a decline in the underlying inflation trend and reach the 5% inflation target in the medium term.
The Committee underscores its commitment to closely monitoring inflation indicators and using all available tools to maintain price stability as its primary objective.
