In a move to contain the depreciation of Turkish lira against the U.S. dollar, Turkey's Central Bank raised its benchmark one-week repo rate by 50 basis points from 7.5 percent to eight percent at the Monetary Policy Committee's meeting yesterday.
In the meantime, the upper band of the interest rate corridor (marginal funding rate) was also increased by 25 basis points to 8.50 percent. The lower upper band of the interest rate corridor remained unchanged at 7.25 percent.
The U.S. dollar fell to 3.37 against the Turkish lira after the Turkish Central Bank's (CBRT) decision, which saw another historic high at 3.42 earlier in the day. However, after the European Parliament's discussion to temporarily suspend Turkey's EU accession talks, the rate again jumped over the 3.44 level, reaching a new historic high. The euro also hit a new record high of 3.63.
The CBRT also decreased the foreign currency reserve requirements of banks by 50 basis points for all terms, in a move to provide the financial system with $1.5 billion of funds.
Deputy Prime Minister Mehmet Şimşek, who is in charge of economy, tweeted after the decision saying "As our prime minister had said at the beginning of the week, we follow economic developments closely, take them seriously, and take necessary measures..."
Speaking to Daily Sabah, economist Kerem Alkin said the Central Bank has increased the rates considering the global uncertainties, as it has to look after the growth along with other macroeconomic figures.
"The bank will pay attention to control cost of Turkish Lira by providing liquidity to markets at each three interest rate level," Alkin said.
He said the decision can also be observed as a step towards the monetary simplification issue since the bank closes the gap between the key interest rate and the upper band - in reference to the bank's plans to change the three-level interest rate system to one key rate.
Turkish Exporters Assembly (TİM) Chairman Mehmet Büyükekşi, who had previously said the interest rates should be low, found the CBRT's interest rate hike positive this time around.
He said, "Even though we, businessmen, believe that interest rates must drop in our country, but it would not match market realities to ignore and leave aside the developments taking place around us."
Stressing that it is important to eliminate volatility in the foreign exchange rate in the current phase, Büyükekşi stated he considers the steps taken to this end to be positive.
Cemil Ertem, Chief Economy Adviser to President Recep Tayyip Erdoğan, said it is important to highlight the CBRT's interest rate decision as it indicates that the bank will independently use its instruments.
Underlining that the central banks of developing countries are also going through a hard time, Ertem noted the CBRT's step reveals it uses its foreign currency liquidity instruments very efficiently. According to him, the CBRT will more efficiently use the instruments in the upcoming period.
The bank cited a deceleration in the economic activity for the third quarter as a reason of the decision to increase interest rates. The bank expects economic activity to recover starting from the final quarter thanks to the supportive measures and incentives provided recently. The committee emphasized the structural reforms as it did in its previous meetings, noting that the reforms would contribute to the potential growth significantly.
While slowdown in aggregate demand contributes to the fall in inflation, the exchange rate movements pose risks on the inflation outlook, according to the bank.
"The Committee decided to implement monetary tightening to contain adverse impact of these developments on expectations and the pricing behavior," the statement released by the CBRT yesterday said.
The bank will be following the inflation expectations, pricing behavior and other factors affecting inflation to make future monetary policy decisions.