MNI WATCH: CBRT Holds Rates, Maintains Hawkish Policy Outlook

The Central Bank of Turkey held its policy rate at 45% on Thursday and kept the more hawkish tone set by new Governor Fatih Karahan in previous comments, with rate hikes on the table should signs point to a significant deterioration in the inflation outlook.

January’s increase in annual inflation to 64.86% from 64.77% in December (6.7% v 2.93% month-on-month) was in line with expectations, Karahan said. Demand for imported goods and gold has moderated at a “robust” rate, he said, but other key indicators have declined at a slower pace than previously expected, with continued upside inflation risks from stickiness in services and food prices, and from geopolitical factors. (See MNI INTERVIEW: CBRT On Track, But Risks Remain - Ex-Vice Gov)

“The Committee assesses that the current level of the policy rate will be maintained until there is a significant and sustained decline in the underlying trend of monthly inflation and until inflation expectations converge to the projected forecast range,” Karahan said, adding that the monetary policy stance “will be tightened in case a significant and persistent deterioration in inflation outlook is anticipated.”

Karahan's remarks contrast with those of previous governor Hafiz Gaye Erkan, who in January raised the policy rate 250bps to 45% but said that the monetary tightness required to establish the disinflation had "been achieved".

Disinflation will be supported as the CBRT’s determination to maintain a tight monetary stance translates into the lira’s appreciation in real terms, Karahan said. (See MNI INTERVIEW: Turkish Cenbank To Balance Growth Vs Inflation)

Karahan reiterated the Monetary Policy Committee’s commitment to making decisions according to a “predictable, data-driven and transparent framework.”