Turkey Monetary Policy July 2016


Despite mounting domestic challenges, Turkey's Central Bank continues its policy normalization

At its 19 July monetary policy meeting, the Central Bank of the Republic of Turkey (CBRT) decided to cut the marginal funding rate by 25 basis points (bps) to 8.75%, while leaving the one-week repo rate at 7.50% and the overnight borrowing rate at 7.25%. This came on the back of reductions in the marginal funding rate at the previous four policy meetings.

The Bank decided to take this “measured” step toward the simplification of Turkey’s monetary policy framework despite the failed 15–16 July coup, which fueled volatility in the financial markets. Analysts had anticipated that the CBRT would adopt a more cautious stance as a result of the domestic political developments. That said, given the smaller scale of the cut (25 bps vs 50 bps at the previous meetings), the Central Bank looks to be approaching to the end of the simplification cycle.

In order to shore up the financial sector and the country’s macroeconomic stability following the failed coup, the Central Bank announced a raft of measures on 17 July. These included providing unlimited liquidity and lowering the commission rate for the Intraday Liquidity Facility to zero.

The Bank reaffirmed in its statement that its tight monetary policy and macro-prudential measures are keeping credit growth at reasonable levels, while the economy is benefiting from resilient domestic dynamics and stronger demand from the European Union.

It acknowledged that recent developments in the country had had a knock-on effect on the financial markets, yet measures announced over the weekend to boost liquidity had tamed market volatility.

Regarding price developments, while the Central Bank stated that overall inflation will likely increase due to higher unprocessed food and tobacco prices, it affirmed that core inflation is expected to improve gradually and that a tighter liquidity stance is still necessary.

Looking forward, the Bank commented that, “future monetary policy decisions will be conditional on the inflation outlook.” Moreover, the Bank reaffirmed its tight monetary policy stance, stating that it “will be maintained”. It plans to closely monitor market developments and maintain the recently announced liquidity measures to support financial stability. The next meeting is scheduled for 23 August.

FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 8.13%. For 2017, the panel expects the rate to rise to 8.17%. Panelists see the marginal funding rate ending the year at 9.45%. For 2017, the panel expects the rate to rise to 9.75%.

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Turkey Monetary Policy Chart

Turkey Monetary Policy July 2016

Note: 1-week repo rate, overnight borrowing rate and marginal funding rate in %.
Source: Central Bank of the Republic of Turkey (CBRT).

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