UPDATE - Turkish Central Bank keeps interest rates unchanged

UPDATE WITH MORE DETAILS

By Aysu Bicer

ANKARA (AA) - The Turkish Central Bank on Thursday kept the policy rate constant in line with market expectations.

The bank's policy rate – also known as the one-week repo rate – stands at 17%, the bank said in a statement, noting that additional monetary tightening would be delivered if needed.

According to the bank, the downward effects of the virus-related restrictions on the economy are more limited compared to the second quarter of last year, yet the slowdown in activity in services and related sectors, and uncertainties surrounding the short-run outlook of these sectors prevail.

The strengthening domestic demand as a result of high credit growth during the pandemic continues to have an adverse effect on the current account balance, it added.

"Nevertheless, credit growth has started to slow down amid tighter financial conditions," it noted.

“Domestic demand conditions, cumulative cost effects, in particular the exchange rate effects, increasing international food and other commodity prices and high levels of inflation expectations continue to affect the pricing behavior and inflation outlook adversely,” the bank said.

The central bank underlined the decelerating impact of the strong monetary tightening implemented in November and December on credit and domestic demand is expected to become more significant.

Therefore, it added, the effects of demand and cost factors on inflation are projected to diminish gradually.

On the other hand, the bank said, the developments in international commodity prices, supply constraints intensifying in some sectors, and the adjustments in wage and administered prices maintain their importance for the medium-term inflation outlook.

- Tight monetary policy stance to continue

The bank made it clear that it will maintain decisively the tight monetary policy stance for an extended period until strong indicators point to a permanent fall in inflation and price stability.

"Inflation expectations will be monitored closely for their compatibility with the targets in the forecast horizon," it added.

A total of 34 economists surveyed by Anadolu Agency on Monday forecast no change in interest rates except for six economists expecting a rise of 50 to 100 basis points in one-week repo rate.

In December, the bank's hike in its benchmark interest rate from 15% to 17% was hailed by markets, seen as showing its determination to fight inflation.

The bank's latest steps to return to orthodoxy in Turkish lira value management have boosted foreign economists' faith in the Central Bank's credibility.

Meanwhile, last month Turkey saw a 14.6% annual hike in consumer prices, according to the country's statistical authority.

The Turkish Central Bank has set a medium-term inflation target of 5%.

Over the course of last year, starting with a rate of 12%, the bank raised its benchmark policy rate a total of 500 basis points.

According to its schedule, the bank will hold twelve MPC meetings this year.