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Turkey Monetary Policy March 2024

Turkey: Bank delivers surprise hike in March

At its 21 March meeting, the Central Bank of the Republic of Turkey (CBRT) raised the 1-week repo rate to 50.00% from 45.00%. The decision surprised market analysts on the upside—they were expecting the Bank to stand pat. However, it did not go directly against prior CBRT guidance, which left the door open to an additional hike at its February meeting in the event of a deterioration in the inflation outlook.

In justifying its decision, the Bank highlighted that inflation came in above expectations in February, chiefly due to stronger price pressures stemming from the services sector. Moreover, it added that inflation ahead was likely to be higher than earlier expected amid robust domestic demand, sticky services inflation, heightened geopolitical risks and rising food prices. Moreover, while imports of goods and gold have continued to soften—boosting the current account balance—the lira remains near record lows; higher rates should support the currency.

The CBRT retained its hawkish tone, reiterating that it would maintain the current interest rate until it saw both inflation and inflation expectations converging to the Bank’s 5.0% medium-term target. Additionally, the Bank stated that it stood ready to deliver additional hikes if it anticipated a marked deterioration in inflation dynamics. Nonetheless, the Consensus is still for the Bank to cut rates by year-end.

The CBRT will reconvene on 25 April.

Clemens Grafe and Basak Edizgil, analysts at Goldman Sachs, said:

“We do not expect today’s hike to be the beginning of a cycle but rather a one-off adjustment to arrest expectations of a depreciation ahead and to reduce inflation expectations. We continue to expect both sequential and annual inflation to start to fall sharply in H2 towards 33% by year-end, allowing the TCMB to start easing monetary policy from Q3 onwards.”

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