Turkey Monetary Policy May 2016


Turkey: Central Bank continues its policy normalization in June

June 21, 2016

At its 21 June monetary policy meeting, the Central Bank (CBRT) decided to cut the marginal funding rate by 50 basis points to 9.00%. The Bank had reduced the marginal funding rate in the previous three policy meetings as well. Moreover, the Bank decided to leave the one-week repo rate at 7.50% and the overnight borrowing rate at 7.25%. This decision, which was in line with market analysts’ expectations, is intended to narrow the Bank’s interest rate corridor and simplify its monetary policy framework.

The Bank’s statement almost mirrored that of May’s meeting. It restated that credit growth remains at reasonable levels due to the Bank’s tight monetary policy and macro-prudential measures. Along with its statement on resilient domestic demand, the Bank also praised the positive impact of stronger demand from the European Union and acknowledged that structural reforms bode well for Turkey’s potential growth.

While the Committee noted a pick-up in global volatility, the measures adopted by the Central Bank to contain risks allowed another “measured” step toward monetary policy simplification.

Regarding price developments, while the Central Bank stated that overall inflation is falling significantly due to lower unprocessed food prices and improved core inflation, it also declared that developments in services inflation and higher labor costs require a tighter liquidity stance. 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”. The next meeting is scheduled for 19 July.

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%.

Author: Ricard Torné, Lead Economist

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Turkey Monetary Policy Chart

Turkey Monetary Policy June 2016 2

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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