Turkey Monetary Policy


Central Bank stays put, reiterates tightening stance

At its 24 April monetary policy meeting, the Central Bank of the Republic of Turkey (CBRT) left the one-week repo rate at 10.00%. The Bank also decided not to change its overnight rate corridor; it left the marginal funding rate at 12.00% and the overnight lending rate for primary dealers at 11.50%. Moreover, the CBRT maintained the borrowing rate at 8.00%. The Bank's decisions were in line with market expectations.

The CBRT, which had hiked the repo rate by a sharp 550 basis points on 28 January in response to the rapid weakening of the lira, stated that the, “strong and frontloaded monetary tightening delivered on January [...] has contained the adverse impact of upside risks on the medium term inflation expectations.”

The Bank added that the, “recent decline in uncertainties and partial improvement in in the risk premium indicators have reduced the need for additional tightening in liquidity policy.” Consequently, the Bank only decided to make a “technical” cut in the late liquidity lending rate from 15.00% to 13.50%. Most analysts agree that this decision is largely symbolic as this rate has not been used in practice. The rest of the statement was broadly unchanged from the previous meeting and the CBRT underlined that it would stick to maintaining its tight monetary policy stance until there is a significant improvement in the inflation outlook.

The Central Bank's decision to keep rates unchanged came amid increasing political pressure from the government to lower interest rates in order to spur economic growth. According to Tevfik Aksoy, economist at Morgan Stanley:

Despite strong calls and outright public pressure from politicians, the CBT stood firm and kept all relevant interest rates unchanged at its MPC meeting. [...] The CBT showed that it would not be impacted by the political pressure (despite various concerns) and we think that it added to its credibility [...]. Overall, we consider the move to be encouraging, supporting currency stability and likely to be helping to narrow any credibility gap in the coming months.

FocusEconomics Consensus Forecast panelists see the marginal funding rate ending the year at 12.14%. For 2015, the panel expects the rate to decline to 11.67%. Meanwhile, FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 10.18%. For 2015, the panel expects the rate to decline to 9.99%.

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Turkey Monetary Policy Chart

Turkey Monetary Policy April 2014

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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