Türkiye's central bank kept its key policy rate, the one-week repo auction rate, constant at 50% on Thursday in line with expectations, citing monetary policy decisions in March that have led to significant tightening in financial conditions.
"The effects of monetary tightening on credit conditions and domestic demand are closely monitored. Considering the lagged effects of the monetary tightening, the Committee decided to keep the policy rate unchanged but reiterated that it remains highly attentive to inflation risks," the Central Bank of the Republic of Türkiye (CBRT) said.
The bank stressed that despite an ongoing decline in March, the underlying trend of monthly inflation was higher than expected.
"While imports of consumption goods and gold contribute to the improvement in the current account balance, other recent indicators imply that domestic demand remains resilient," it added.
It noted that in addition to the high level and the stickiness of services inflation, inflation forecasts, geopolitical risks and food prices keep inflationary pressures alive.
Türkiye's annual inflation rate climbed to 68.5% in March and is forecast to peak around 70% this quarter before falling in the second half of this year and through 2025.
The bank has added 4,150 basis points to borrowing costs since last June, following a U-turn in economic policies after the presidential and parliamentary elections.
"The tight monetary stance will be maintained until a significant and sustained decline in the underlying trend of monthly inflation is observed and inflation expectations converge to the projected forecast range," the bank pledged.
Moreover, it said that the monetary policy stance would be tightened "in case a significant and persistent deterioration in inflation is foreseen."
Last month, the monetary authority stunned markets with a 500 basis points hike shortly before the local elections, hiking its rate to 50% from 45%.
On Thursday, the bank reiterated that it expected the disinflation process to be established in the second half of 2024.
"The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation through moderation in domestic demand, real appreciation in Turkish lira and improvement in inflation expectations. Consequently, disinflation will be established in the second half of 2024," it said.
Earlier this week, Treasury and Finance Minister Mehmet Şimşek also conveyed the expectations that a decrease in inflation would begin in the coming months.
"We will rapidly observe its decline starting from June. This is a process parallel to our program. Therefore, while reducing inflation, we are establishing fiscal discipline, decreasing the current account deficit and strengthening Türkiye's structure with structural reforms," he told reporters.
Last week, CBRT Governor Fatih Karahan told a panel in Washington that the rate-hiking cycle is over and inflation is on track to reach its 36% target by the end of the year. The bank foresees inflation dipping to 14% in 2025 and falling to single digits in 2026. The governor, however, is expected to deliver the latest projections on inflation in May.
Türkiye walked away from years of easing policy after last year's elections. It delivered aggressive tightening aimed at cooling demand to curb inflation, rebuilding reserves and flipping chronic current account deficits to surpluses.
The market at large and analysts expected the bank to maintain the tightening at the current level in April. The bank had earlier bolstered its stance by introducing measures to curb credit card spending and raising monthly targets for lenders to increase the share of lira deposits.
Last week, an Anadolu Agency (AA) survey showed that economists had expected the central bank to keep its policy rate steady. On the other hand, a Reuters poll of economists showed that the central bank will not trim its policy rate from 50% until the fourth quarter.
The poll showed that they anticipate deducting 250 basis points in Q4 to put the rate at 47.5%. Further reductions are expected to occur next year, and the rate would be 30.0% by the end of 2025, according to the poll.
"The Committee continues to implement macroprudential policies that preserve the functionality of the market mechanism and macro-financial stability. In this context, the monetary transmission mechanism will continue to be supported in case of unanticipated developments in credit growth and deposit rates," the central bank said.
