Turkey Monetary Policy


Central Bank cuts rates amid slowing economic activity

At an interim meeting on 4 August, the Monetary Policy Committee (MPC) unexpectedly slashed the 1-week repo rate by 50 basis points from 6.25% to 5.75%, which represents the lowest interest rate since the country adopted an inflation targeting policy in 2002. In addition, the Committee decided to narrow the overnight interest rate corridor with a 350 basis point hike in the overnight lending rate to 5.0% and decided to provide foreign exchange liquidity to the market, through foreign exchange selling auctions on the days deemed necessary to offset pressure on the lira. Although the decision was unexpected, the CBRT had already hinted at the possibility of cutting the repo rate at a previous MPC meeting on 21 July. While leaving the repo rate unchanged at the time, the CBRT had in fact declared that it would shift to monetary loosening if European sovereign debt problems intensify and domestic activity grinds into recession. Previously, the CBRT had already taken pre-emptive action against the continued depreciation of the Turkish currency on 25 July, when it announced an unexpected cut in long-term commercial banks' reserve requirement ratio (RRR) for foreign currency deposits.


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