“A front-loaded and strong additional monetary tightening.”
By Wolf Richter for WOLF STREET.
In a shock-and-awe move, the Central Bank of Turkey today jacked up its policy rate, the one-week repo rate, by two full percentage points, from 17% to 19%. Economists had expected a rate hike of half that magnitude.
The Monetary Policy Committee said in its press release that, considering the inflation developments – the inflation rate had jumped to 15.6% in February – it “has decided to implement a front-loaded and strong additional monetary tightening.”
And more hikes are on the way: “The 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.”
The battered lira – over the past five years, it has plunged 60% against the US dollar, even after the 15% rise since the low point in November – jumped 1.5% today against the dollar.
Turkey’s government and corporate sector have borrowed heavily in foreign currency, primarily in euros and dollars. That debt gets difficult to service with a plunging lira. This has left Turkey teetering on the edge of a financial crisis for the past three years.
Other developing economies are now facing a similar quandary: Inflation is shooting higher, their currencies need to be propped up, and debt levels have exploded during the Pandemic from already high levels.
Brazil’s shock-and-awe rate hike yesterday.
The Central Bank of Brazil put down the hammer with a rate hike of 0.75 percentage points yesterday, bringing its Selic rate to 2.75%. A rate hike had been expected but not a Volker-type surprise monster.
And it said that another biggie of “the same magnitude” is likely to come “at the next meeting.”
The primary topic in the statement released by the rate-setting committee (Copom) was inflation, and the rate hike was designed to combat it. Inflation shot up to 5.2% in February from 4.6% in January.
“The continuing increase in commodities prices, measured in local currency, are affecting current inflation and triggered additional increases in inflation forecasts for the next months, especially through its effects on fuel prices,” it said.
“The various measures of underlying inflation are in levels above the range compatible with meeting the inflation target,” it said.
And it added that “the Committee maintains the diagnosis that the current shocks are temporary.” Which is what the Fed has said it will say when inflation numbers become ugly over the next few months.
The Bank of Brazil is tightening monetary policy – engaging in “a partial normalization process,” as it said – because the stimulus is not needed anymore, with GDP “growing strongly at the margin” at the end of 2020, with inflation expectations “above target at the relevant horizon for monetary policy,” and with inflation projections “close to the upper bound of the target for 2021.”
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