Turkey Monetary Policy


Central Bank raises lending rates for first time in two years to shore up lira

At its 23 July monetary policy meeting, the Central Bank of the Republic of Turkey (CBRT) decided to maintain the one-week repo rate at 4.50%. It also kept the overnight borrowing rate at 3.50%, but increased the overnight lending rate by 75 basis points to 7.25% (6.75% for primary dealers). The asymmetric hike was no surprise to market players given CBRT Governor Basci's written announcement on 15 July stating that: "a measured step to widen the interest rate corridor will be on the agenda of the next meeting." Furthermore, the Bank announced that on additional monetary tightening days will not sell foreign currency and it will not provide funding to banks via the primary dealer repo facility. By cutting off primary dealers from the cheaper lending rate on those additional tightening days, the CBRT effectively raises the lending rate on those days by an additional 50 basis points. With its decision to focus its tightening on specific days the Central Bank gains flexibility and shifts the burden of supporting the lira to interest rates rather than loosing additional foreign reserves.

The Central Bank argued that domestic demand continues on a recovery path, while exports are growing at a more moderate pace. In addition, the Bank noted that the current account deficit, excluding gold trade, remains stable. Capital inflows slowed down as a result of uncertainty regarding global monetary policies. While the Monetary Policy Committee considered the recent spike in consumer prices as temporary, it acknowledges that higher food prices, rising oil prices, and the weaker lira "may continue to have adverse impact on inflation in the short term". Therefore, the Bank deems a "measured monetary tightening" necessary to contain inflationary pressures. The Committee maintained its hawkish tone, stating that additional monetary tightening may be implemented until inflation returns to the medium-term target.

FocusEconomics Consensus Forecast panellists see the one-week repo at 4.68% at the end of this year. For 2014, the panel expects the rate to rise to 5.41%.

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Turkey Monetary Policy Chart

Turkey Monetary Policy July 2013

Note: 1-week repo rate in %, from 25 May 2010 onwards. From January 2008 until 25 May 2010, data refer to overnight borrowing rate.
Source: Central Bank of the Republic of Turkey (CBRT).

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