Turkey Monetary Policy


Turkey: Central Bank cut key rate amid political pressure

January 20, 2015

At its 20 January monetary policy meeting, the Central Bank (CBRT) decided to cut the one-week repo rate by 50 basis points to 7.75%. The decision caught market participants by surprise as they had not expected the Bank to make a change at this meeting. The Bank, however, left the borrowing rate unchanged at 7.50%, the marginal funding rate at 11.25%, and the interest rate on borrowing facilities provided for primary dealers at 10.75%.

Similar to its previous statement, the CBRT pointed out that loan growth remains at reasonable levels due to the tight monetary policy stance and macroprudential measures. Regarding external developments, the Bank restated that external demand is still weak, but that favorable terms of trade will continue to contribute to rebalancing the current account. Domestically, monetary authorities recognized that the structural reforms adopted by the government will help increase potential growth.

Regarding consumer price developments, the Central Bank underscored that the current monetary policy stance is keeping inflation pressures contained and that falling commodity prices will contribute to disinflation. Against this backdrop, the CBRT decided to deliver a “measured” cut in the one-week repo rate and affirmed that, “future monetary policy decisions will be conditional on the improvements in the inflation outlook.” Moreover, the Bank reaffirmed its tight monetary policy stance by, “keeping a flat yield curve, until there is a significant improvement in the inflation outlook.” The next monetary policy meeting is scheduled for 24 February.

The decision to cut Turkey’s main policy rate came after President Recep Tayyip Erdogan publicly criticized the Central Bank for not cutting rates as oil prices are in freefall. Erdogan stated that the Central Bank is not acting although interest rates are being reduced across emerging markets and declared that he would even call policymakers to discuss the decision “if necessary”. This situation caused concerns regarding the independence of the Central Bank to resurface. Analysts, however, point out that the decision will not alter market dynamics significantly as the interest rate corridor was unchanged.

FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 8.17%. For 2016, the panel expects the rate to rise to 8.47%. Meanwhile, FocusEconomics Consensus Forecast panelists see the marginal funding rate ending the year at 11.36%. For 2016, the panel expects the rate to increase to 12.20%.

Author: Ricard Torné, Lead Economist

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Turkey Monetary Policy Chart

Turkey Monetary Policy January 2015

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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