Central bank on the watch; more rate hikes “if” needed

As expected at the central bank’s Monetary Policy Council (MPC) meeting the policy rate was kept unchanged at 17.0%.

The bank however underlined it is aware of the risks to inflation target stemming from strong pass though, still strong domestic demand and the recent spike in the global commodity prices.  Hence the most eye-catching sentence was the acknowledgement of “additional monetary tightening to be delivered if needed” as the bank once again stressed its dedication to keep the policy stance tight amidst ongoing high inflation expectations.

The MPC made no mention about its plans to launch fx borrowing scheme as was announced by Governor Agbal in the previous week as the local fx deposit holders still refrain from switching to TL in significant amounts along with lack of credibility in the government’s economic and political policy choices.

Nevertheless, the promise of no immature rate cuts keeps TL firm as it’s trading at 6.93 versus the US dollar which is only slightly weaker than the morning hours’ level of 6.92.

Below are the high lights from the MPC announcement: 

– Economic activity is on a strong course; yet credit growth has started to slow down amid tighter financial conditions.

– The slowdown in activity in services and related sectors and uncertainties surrounding the short-run outlook of these sectors prevail. The strengthening domestic demand, due to the cumulative effects of high credit growth during the pandemic, continues to have an adverse effect on the current account balance.

– Risks to inflation: domestic demand conditions, cumulative cost effects related with the exchange rate weakness, increasing international food and other commodity prices and high levels of inflation expectations, supply constraints intensifying in some sectors, and the adjustments in wage and administered prices. 

– Strong monetary tightening will start weighing down credit growth and domestic demand gradually expected to wane inflationary forces.

– Tight monetary policy stance will be maintained decisively, taking into account the end-2021 forecast target, for an extended period until strong indicators point to a permanent fall in inflation and price stability.

– Additional monetary tightening will be delivered if needed.

– 5% inflation target remains in place hence “balance between the monetary policy rate and actual/expected inflation will be sustained decisively.”