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Turkey Monetary Policy October 2021

Turkey: Central Bank delivers a bigger-than-expected rate cut in October, sending the lira sliding

The Monetary Policy Committee of the Central Bank of Turkey (CBRT) took market analysts by surprise yet again at its meeting on 21 October, when it decided to deliver a 200 basis-point cut. The decision took the one-week repo rate from 18.00% to 16.00%—its lowest level since late December 2020. It followed the removal of three members of the Committee the week prior and was powered by President Erdogan’s frequent calls for the interest rate to be lowered, despite sticky inflation. The move shook investor confidence and sent the Turkish lira tumbling to a new record low, as it ended 21 October at TRY 9.52 per USD. This marked a massive 9.4% depreciation from the same day a month prior, and a 21.9% depreciation year-to-date.

In deliberating its decision, the Bank stated that the recent uptick in inflation is of a transitory nature, while the tight monetary stance “has started to have a higher-than-envisaged contractionary effect on commercial loans” and personal loan growth has begun to slow. However, the Bank noted that “domestic economic activity remains strong, with the help of robust external demand”. Consequently, the size of the rate cut stunned market analysts, who had largely expected a 50–100 basis-point decrease.

Despite the sizable cuts delivered in the last two meetings, the Bank seemingly aimed to sound more hawkish in its October statement, highlighting that “supply-side transitory factors [will] leave limited room for the downward adjustment to the policy rate” for the rest of the year. The Bank also reiterated that it “will continue to use decisively all available instruments until strong indicators point to a permanent fall in inflation and the medium-term 5.0% target is achieved in pursuit of the primary objective of price stability”.

The next meeting is scheduled for 18 November.

Gokce Celik, senior CEE economist at UniCredit, added:

“On the inflation front, the MPC remained too optimistic, in our view, repeating its argument that the recent rise was due to transitory factors. […] The upward trend in inflation momentum will likely resume soon as the currency depreciation that started in September feeds into price growth. […] While the CBRT might have intended to sound cautious by hinting that its next move will not be as bold as the one delivered this month, we interpret this as a clear indication that its easing bias is to be maintained. Given Turkish President Recep Tayyip Erdogan’s desire for lower rates, we think the CBRT will continue to reduce rates further until market conditions force it to stop, or possibly reverse rate cuts.”

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