Turkey Monetary Policy


Central Bank increases reserve requirement but refrains from raising interest rates

At its 23 March meeting, the Monetary Policy Committee (MPC) left the 1-week repo rate unchanged at 6.25%. The Committee decided to maintain the policy rate for a second straight meeting, after cutting it by 25 basis points in January. However, the Central Bank (CBRT) announced a further increase in commercial banks' reserve requirement ratio (RRR). According to the press release, the RRR hike, which is one component of the policy mix, which includes a low policy rate, a wide interest corridor and high RRR, ?provides the monetary tightening required for containing the potential second round effects of the recent increases in oil and other commodity prices? without triggering an appreciation of the Turkish lira. While the Central Bank expects that the measures implemented since last November will impact credit growth and domestic demand starting in the second quarter, it stated that the RRR hike ?was necessary for ?macro-prudential' purposes, [as] the measures aim at containing the macro financial risks by inducing a more balanced composition of the aggregate demand?. Against a backdrop of buoyant domestic demand, the CBRT is increasingly concerned with a widening current account deficit, which reached an estimated 7.5% of GDP in February. At the same time, price stability ? the primary objective of the CBRT ? remains under control at the outset of the year, with inflation falling to its lowest level on record in March. In fact, a benign inflation environment has been a crucial element in providing scope for the Bank to test its new policy mix.

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