Central Bank MPC meeting summary has been published. In the report, which was announced after the interest rates were increased from 8.50 percent to 15 percent, it was stated that “It was decided that the simplification policy would be gradual for a smooth transition period”.

The Central Bank of the Republic of Turkey (CBRT) raised interest rates by 650 basis points from 8.50 percent to 15 percent on June 22. The summary report of the Monetary Policy Committee (MPK) meeting of the CBRT dated 22 June 2023 was published.

The most striking statement in the report was that the simplification policy would be ‘gradual’. It was also stated that the interest rate hike was the first step of the monetary tightening process.

“With the monetary policy decision, the Board made determinations regarding loan growth, loan and deposit rates. Sensitivity analyzes were made from the perspective of financial stability, and it was evaluated that the banking system is strong and resilient against increases in policy interest rates.

Credit growth increases domestic demand and poses a risk to inflation. As of June 16, 2023, compared to the end of 2022, the balance of consumer loans increased by 65.7 percent in credit cards, 63.1 percent in vehicle loans, 27 percent in consumer loans and 21.3 percent in housing loans, a total of 38.1 percent. On the other hand, general purpose loan growth has slowed down since the last MPC period. The expansion of the scope of the application of securities based on loan growth and the increase in deposit rates due to existing regulations were effective in this development.

The difference between loan and deposit rates and policy rates increased in the previous MPC period. As of the week of June 16, 2023, the average consumer loan (excluding KMH) interest rates in the sector increased by 749 basis points compared to the pre-regulation period and reached 41.7 percent. Turkish lira commercial loan interest rates were 14.7 percent with a flat course. The deposit rate increased by 674 basis points to 30.3 percent since the previous MPC period. The upward effect of the abolition of the interest rate cap on Currency Protected Deposits continues.

In this framework, the Committee evaluated the necessity of increasing the functionality of market mechanisms through monetary tightening and simplification of the existing micro- and macroprudential framework.

The Board will determine the policy rate in a way that will create the monetary and financial conditions that will ensure the underlying trend of inflation to decline and reach the 5 percent target in the medium term. The Committee evaluated that the current monetary policy framework is far from achieving the 5 percent inflation target, given the inflation outlook and upside risks. It has been pointed out that the deterioration in price stability threatens macroeconomic stability and especially financial stability. Accordingly, the Board decided to implement a monetary tightening process, the steps of which are gradually strengthened when and as necessary. The monetary tightening process is expected to continue until a significant improvement is achieved in the inflation outlook.

The one-week repo auction rate, which is the policy rate, was increased from 8.5 percent to 15 percent. The Board envisages this decision as the first step of the monetary tightening process initiated to establish disinflation as soon as possible, to anchor inflation expectations, and to control the deterioration in pricing behavior.

The Committee examined the analysis of the effects of the monetary tightening process on macroeconomic and financial conditions. The effects of interest rate hike scenarios on key macroeconomic variables such as inflation, loan growth, loan and market rates, economic activity, expectations and banking stress tests were evaluated. Inflation outlook necessitates taking new steps in this direction.

Indicators of inflation and the trend of inflation will be closely monitored, and the CBRT will continue to resolutely use all the tools at its disposal in line with its main objective of price stability.

The Committee has determined that inflation, which is far away from the target, requires the effective use of monetary policy. The effectiveness of monetary policy will increase with the start of the monetary tightening process.

In addition, the Board determined that the current micro- and macroprudential framework is weak in supporting macro financial stability and negatively affects the functionality of market mechanisms. In this direction, a simplification policy has been adopted in this framework. The existing micro- and macroprudential framework will be simplified to increase the functionality of market mechanisms and strengthen macro financial stability. It has been decided that the simplification policy will be gradual for a smooth transition process. In the simplification process, the speed and order of the transformation will be determined by impact analysis. The impact analyzes of the regulations made by the CBRT, together with their reflections on inflation, interest rates, exchange rates, reserves, expectations, securities and financial stability for all components of the said framework.