With an unexpected move, the Central Bank increased the 1-week repo rate, which we know as the policy rate, by 200 basis points from 8.25% to 10.25%. In an environment where the deepening depreciation of TRY and increased inflation risks, the Central Bank increased its policy rate where TRY continued to lose value after the side-way tightening since August. In this first hike after 2018, when the last rate hike was made, we see that the Central Bank acted directly after a few weeks of liquidity management and carried out this tightening move within the simple monetary policy mechanism.
The tightening implemented since August was by adjusting the borrowing limits of the banks, ending the funding below the benchmark interest rate and turning to the upper bands and increasing the weight of the LLW for daily funding. In this context, the funding rate increased by more than 300 basis points during the process and thus a side-way tightening was achieved. Loan and deposit rates moved upwards with this increase in funding costs. However, there was a gap between the interest rates applied in the market and the official monetary policy rates, and the funding cost settled in the LLW - interest corridor range both made the monetary policy outlook of the Central Bank complex and narrowed the room for tightening. The fact that the official monetary policy outlook is loose compared to the current inflation outlook and that we do not meet the “reasonable real interest criteria” are among the most important reasons why the depreciation of TRY continued despite the tightening measures during this period.
In the policy statement of the Central Bank; "The Committee considered that the tightening steps taken since August should be strengthened in order to contain inflation expectations and the risks regarding the inflation outlook."phrase stands out. It shows that the Central Bank has been evaluating tighter policy steps against inflation risks, which it has been aware of since August. In this context, it may be possible for the Central Bank, which reacts with a high increase in the policy interest, to take additional tightening steps in the upcoming period.
Adjustments to the interest corridor and LLW and the asymmetric corridor were technically expected. The most important reason for this expectation was the narrowing of the room for action of the side-way monetary policy tightening. The opening of the gap between the policy rate and the funding rate highlighted the view that the corridor could be adjusted rather than a cumulative rate hike. Unless the Central Bank directs otherwise, it keeps the interest rate corridor symmetrically at 150 basis points below and above the policy rate. With the 200 basis point hike, the overnight lending rate, which is the upper band of the interest corridor, reached 11.75% and the late liquidity window reached 13.25%. Thus, the changing funding conditions and the interest rate corridor were matched and additional space was opened for the Central Bank. The marginal effect of the increase of the policy interest to 10.25%, on the interest rates applied in the market is not much because there is no additional tightening in practice. This situation will be affected by the continuing increase in the funding rate within the corridor that the Central Bank has adjusted.
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Hibya Haber Ajansı