Turkey Monetary Policy


Turkey: Central Bank cuts interest rates amid political pressure

February 24, 2015

At its 24 February monetary policy meeting, the Central Bank (CBRT) decided to cut the one-week repo rate by 25 basis points to 7.50%. The decision caught market participants by surprise because they had not expected the Bank to make a change at this meeting. In addition, the Bank decided to reduce the borrowing rate from 7.50% to 7.25%, the marginal funding rate from 11.25% to 10.75%, and the interest rate on borrowing facilities provided for primary dealers from 10.75% to 10.25%.

The CBRT pointed out that loan growth is at reasonable levels due to the tight monetary policy stance and macroprudential measures. Similar to the previous statement, the Bank stated that while external demand is still weak, domestic demand is contributing to moderate growth. Regarding external developments, the Bank restated 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 and macroprudential policies are having a favorable effect on inflation pressures. The Bank sees core inflation continuing to decline. Against this backdrop, the CBRT decided to deliver a “measured” cut to the interest rates, taking into consideration the high volatility in food and energy prices. Looking forward, the Bank commented 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 17 March.

Following the Central Bank’s announcement, Prime Minister Ahmet Davutoglu criticized the decision – saying that the cut should have been larger. The decision to cut Turkey’s main policy rate came after President Recep Tayyip Erdogan’s ongoing public criticism of the Central Bank for not cutting rates as oil prices are in freefall. This situation caused concerns regarding the independence of the Central Bank to resurface.

FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 7.53%. For 2016, the panel expects the rate to rise to 7.93%. Meanwhile, FocusEconomics Consensus Forecast panelists see the marginal funding rate ending the year at 11.42%. For 2016, the panel expects the rate to increase to 11.25%.

Author: Angela Bouzanis, Senior Economist

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Turkey Monetary Policy Chart

Turkey Monetary Policy February 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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