Turkey: MPC hikes policy rate by 5pps to 50%, expands ON rate corridor

• MPC sets ON lending rate 3pps above policy rate, compared to previous 1.5pps
• MPC explains policy rate hike with deterioration in inflation outlook
• MPC vows to maintain tight policy stance, more tightening kept on table
• Not only decision, but also decision text is hawkish, with potential to improve policy credibility, in our view

The MPC has decided to raise the policy one-week repo rate by 5pps to 50.0% on its monthly rate-setting meeting today, the CBT said in a?press release. The decision was surprising to markets at least partially because recent polls showed a market consensus forecast for a hold decision on the policy rate. The MPC has also decided to expand the overnight (ON) interest rate corridor. It stated that the ON borrowing and lending rates were set at 3pps below and above the policy rate, compared to 1.5pps, previously. Accordingly, the ON borrowing rate rose to 47.0% and the ON lending rate to 53.0%. The consequent 6.5pps increase in the ON lending rate will provide the CBT with more space to timely intervene on the market in case of excess liquidity, in our view. That said, the expansion of the ON rate corridor strengthens the MPC's message of determination to fight high inflation, in our view. Furthermore, we think that the timing of the rate hike is important for the credibility of the CBT as regards to policy independence, given that the rate hike came days before the municipal elections on Mar 31.

The MPC explained the surprising policy rate hike with deterioration in the inflation outlook. It said that the underlying trend of monthly inflation was higher than expected, led by services inflation. The Committee also underlined its observation that domestic demand remained resilient recently, despite some slowdown in imports of consumption goods and gold. The MPC included inflation expectations among the factors of inflationary pressures in addition to the previous meetings' reference to the factors such as stickiness in services inflation, geopolitical risks and food prices. Apart from the inflation developments and expectations and resilient domestic demand, a recent increase in residents' demand for FX was influential in the rate-hike decision, in our view. In this context, the MPC once more implied a target for real appreciation of the lira exchange rate. It said the decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation of lira, and improvement in inflation expectations. The Committee concluded that disinflation will be established in H2/2024.

The MPC kept its policy guidance tilted towards tightening. Tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation, and inflation expectations converge to the forecast range, the statement read. It added that the policy stance will be tightened in case of significant and persistent deterioration in inflation is anticipated. The MPC noted the macroprudential measures taken in March tightened financial conditions, and signalled that tightening via alternative tools may continue. Specifically, it said that the monetary transmission mechanism will continue to be supported in the event of unexpected developments in credit growth and deposit rates. A note on the possible use of tools to sterilise market liquidity was maintained if needed.