Turkey Monetary Policy


Turkey: Central Bank cuts key policy rate again in June

June 24, 2014

At its 24 June monetary policy meeting, the Central Bank of the Republic of Turkey (CBRT) lowered the one-week repo rate by 75 basis points to 8.75%, which followed the previous month’s 50 basis points cut. The size of this move came as a surprise to market analysts as they had expected a more moderate 50-basis-point reduction in the key interest rate. The Bank, however, decided not to change its overnight rate corridor; it left the marginal funding rate at 12.00% and the borrowing rate at 8.00%. Moreover, the CBRT maintained the overnight lending rate for primary dealers at 11.50%.

In its accompanying statement, the Central Bank noted that loan growth is at reasonable levels and that private demand has improved slightly. In addition, the Bank added that foreign demand recovery will lead to a significant narrowing in the current account balance for this year. Regarding price developments, the CBRT stated that the impact of a weak lira will gradually fade, which will drive down inflation in the coming months. The improvement in global liquidity conditions also played a role in the Bank’s decision. Despite the rate cut, the Bank stated that its monetary policy stance will continue to be tight by, “keeping a flat yield curve,” and that it will remain this way until there is a significant improvement in the inflation outlook.

Meanwhile, some analysts warned that the recent rate cuts may be a signal that the Central Bank has yielded to government pressures to lower interest rates ahead of the August presidential elections. This positon will likely erode the Central Bank’s reputation as an independent policy maker. In addition, economists declared that instability in Iraq and Ukraine is forcing the Central Bank to maintain a tightening bias.

FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 10.00%. For 2015, the panel expects the rate to decline to 9.89%. Meanwhile, FocusEconomics Consensus Forecast panelists see the marginal funding rate ending the year at 11.86%. For 2015, the panel expects the rate to decline to 11.58%.

Author: Ricard Torné, Lead Economist

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Turkey Monetary Policy Chart

Turkey Monetary Policy June 2014

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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