The bank faced heavy market pressure to raise rates as the lira has weakened beyond the bank’s expectations, inflation is well above target of 5 percent, the $60bn current account deficit may not be sustainable; and net reserves of around $38bn cover a couple of month’s worth of imports. Yet, the government has been insisting on keeping the interest rate low ahead of elections this year.
Statement by the Central Bank of Turkey:
Recent data suggest that final domestic demand and exports continued to grow at a moderate pace during the fourth quarter. The cautious monetary policy stance, the announced macroprudential measures, and weak capital flows lead to a gradual slowdown in loan growth. Accordingly, the decline in the current account deficit excluding gold trade is expected to continue in 2014.
The Committee monitors the impact of the recent increase in the risk premium on the inflation outlook and expectations. Inflation is likely to hover above the 5 percent target for some time due to recent tax adjustments and lagged effects of exchange rate developments. The Committee stated that the liquidity stance should be tightened to align inflation outlook with the medium term targets. To this end, interbank money market interest rates will materialize at 9 percent during additional monetary tightening days, instead of 7.75 percent (the marginal funding rate).
It should be emphasized that any new data or information may lead the Committee to revise its stance.