Turkey Monetary Policy


Central Bank increases reserve requirement but refrains from raising interest rates

At its 21 April meeting, the Monetary Policy Committee (MPC) left the 1-week repo rate unchanged at 6.25%, in a decision widely expected by the market. The Committee decided to maintain the policy rate for a third straight meeting, after cutting it by 25 basis points in January. However, the Central Bank (CBRT) announced a further ? albeit smaller ? increase in commercial banks' reserve requirement ratio (RRR). In contrast to other RRR actions, the Bank decided to hike requirements by 100 basis points only on short-term deposits, both in local and foreign currency, in order to drain some liquidity from the market. The CBRT maintained its dovish tone, as authorities appeared confident that the unconventional strategy adopted since last December will succeed in controlling inflation at a lesser cost to the external accounts. The MPC stated that in ?light of these assessments, in order to contain the risks towards price stability and financial stability, the Committee has decided to monitor the tightening impact of the implemented policy mix?a low policy rate, a wide interest corridor and high reserve requirement ratios?and take additional measures along the same lines, if needed?, leaving the wording unchanged for a third consecutive meeting. Moreover, in its April Inflation Report ? the first signed by the new Central Bank Governor Erdem Basci ? the CBRT raised this year's official inflation forecast by a full percentage point to 6.9%, due to higher oil prices than were anticipated in the January report base scenario. The target for this year, however, remains at 5.5%. In the report, the Central Bank also highlighted its pledge to rebalance the GDP growth pattern through measures designed to slow domestic demand (and imports), in order to tackle a widening current account deficit.

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