The right step of the central bank: increase of 200 basis points in interest rates

The Monetary Policy Committee (the Committee) has decided to increase the policy rate, which is the one-week repo rate, from 17% to 19%.

With the effect of expansive monetary and fiscal policies and the positive evolution of the vaccination process, there is an improvement in the prospects for global growth and an increase in the international prices of raw materials. The rise in world inflation expectations generates uncertainty regarding the monetary policies of developed countries and volatility in world financial markets.

Economic activity is following a strong course. Economic activity is expected to increase in services and related sectors as constraints caused by the epidemic ease. However, depending on the possible evolution of the course of the epidemic, the risks to economic activity remain significant. In addition to strong domestic demand due to the cumulative effects of the high credit growth achieved during the epidemic period, increases in import prices continue to negatively affect the current account balance. On the other hand, loan growth, which has slowed down due to tighter financial conditions, has recently shown an upward trend.

The conditions of domestic demand, the effects of accumulated costs, in particular the exchange rate, the increase in international prices of food and other raw materials, and the high levels of inflation expectations continue to negatively affect the behavior of the prices and inflation outlook. On the other hand, wage and price adjustments managed by supply restrictions in some sectors remain important in the medium-term inflation outlook. While the expectation that the slowing effects of monetary tightening on loans and domestic demand will become more apparent, the recent upward trend in loan growth and rising import costs delay the gradual improvement in demand and cost factors.

Taking into account the upside risks that these events pose on inflation expectations, price behavior and the medium-term inflation outlook, the Committee has decided to introduce an additional strong monetary tightening anticipated.

Considering the year-end forecast target 2021, the tight monetary policy stance will be resolutely maintained for a long time until strong indicators are formed pointing to a permanent drop in inflation and price stability. Within the scope of strong indicators that point to a permanent decrease in inflation and price stability, the underlying trend of inflation and indicators of price behavior, diffusion indices, demand and cost factors and inflation expectations will continue. being closely monitored with the goals within the forecast. horizon. If necessary, an additional monetary adjustment will be applied.

Until permanent price stability and a target of 5 percent are reached, the balance between the monetary policy interest rate and real / expected inflation will be resolutely maintained in a way that maintains a strong disinflationary effect. It has been evaluated that maintaining the restrictive monetary policy stance in this way will not only establish price stability permanently, but will also positively affect macroeconomic and financial stability through the decrease in country risk premiums, the beginning of the substitution of inverse currency, an upward trend in foreign exchange reserves and a permanent decrease in financing costs.

The CBRT adopts an analysis framework based on all the factors that affect inflation and their interaction with a medium-term perspective in its decision-making processes. It should be emphasized that any new data and news that are announced may cause the Board to change its political stance going forward.

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