Turkey Monetary Policy


Central Bank tightens the reins to support a weakening lira

At an unscheduled monetary policy meeting on 28 January, the Central Bank of the Republic of Turkey (CBRT) decided to increase the marginal funding rate - previously known as the overnight lending rate - by 425 basis points to 12.00% and the one-week repo rate by 550 basis points to 10.00%. The Bank hiked the overnight lending facility for primary dealers by 560 basis points to 11.50% and the borrowing rate by 450 basis points to 8.50%. In addition, the Bank stated that liquidity would be mainly provided through the one-week repo rate instead of the marginal funding rate.

In a separate press release, the Bank announced that, in order to simplify the operational framework, it had also ended the additional liquidity tightening policy, which means that the cost of funding would increase on certain days. The unexpected monetary tightening came shortly after the Bank had decided to maintain all of the main policy rates unchanged at the 21 January meeting and it also followed the Bank's 23 January decision to intervene directly in the foreign exchange market in order to prop up the lira.

The Bank acted decisively to support a weakening lira, which has spurred inflationary pressures and destabilized the country's financial markets. The lira has slid to an all-time low since mid-December. The fall is mainly due to growing political uncertainty following the graft probe against people connected to the ruling AKP party as well as the U.S. Federal Reserve's announcement that it would taper its bond-buying program.

In its statement, the Bank vowed that the tight monetary policy stance would last, "until there is a significant improvement in the inflation outlook." In this regard, the Bank expects inflation to gradually move toward the 5.0% target in the second half of 2014 and to reach it by mid-2015. In addition, the Bank has now accepted that domestic and external developments are having a greater impact on risk perceptions than it had previously acknowledged.

Although the aggressive monetary tightening adopted by the Bank is a visible move toward a more orthodox monetary policy, which will likely boost the Bank's credibility, analysts warned that it will harm economic growth in the forthcoming period. This situation has triggered speculation that the Bank's change of stance could have a damaging effect on the government, as it may cloud Prime Minister Recep Tayyip Erdogan and the AKP's success in the March local election, which will be a crucial test in advance of the presidential election scheduled for the summer.

The Turkish lira recovered slightly following the Bank's decision to tighten its monetary policy stance. On X February, the lira traded at 2.XX per USD, which was X.X% stronger than on 27 January when the Bank announced the unscheduled monetary policy meeting. On an annual basis, however, the lira is down XX.X%. FocusEconomics Consensus Forecast panelists expect the lira to trade at 2.12 per USD by the end of this year. For 2015, the panel projects that the lira will trade at 2.11 per USD.

FocusEconomics Consensus Forecast panelists see the marginal funding rate ending the year at 8.94%. For 2015, the panel expects the rate to decline to 8.44%. Meanwhile, FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 5.05%. For 2015, the panel expects the rate to rise to 6.22%.

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Turkey Monetary Policy Chart

Turkey Monetary Policy January 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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