Turkey Monetary Policy


Turkey: Central Bank delivers another “measured” rate cut in July

July 17, 2014

At its 17 July monetary policy meeting, the Central Bank of the Republic of Turkey (CBRT) cut the one-week repo rate by 50 basis points to 8.25%, which followed the previous month’s 50 basis points cut. This month’s decision was in line with market expectations. The Bank also lowered the borrowing rate by 50 basis points to 7.50%. Conversely, the CBRT decided not to change the marginal funding rate (12.00%) and the overnight lending rate for primary dealers (11.50%).

The Bank’s accompanying statement was broadly unchanged from last month. The CBRT 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 while high food prices have limited the decline in inflation, the impact of a weak lira is gradually fading. The improvement in global liquidity conditions also played a role in the Bank’s “measured” rate cut. As in previous statements, the Bank reaffirmed its tight monetary policy stance by, “keeping a flat yield curve,” until there is a significant improvement in the inflation outlook.

Although more rate cuts are expected down the road, analysts consider that the easing cycle is close to the end. Yarkin Cebeci, economist at J.P.Morgan, reckons that the Central Bank will not be able to bring the policy rate below 8.00%:

“First of all, inflation is proving to be stickier than what the authorities expected or hoped. A second and perhaps more important factor […] The difference between the 5-year bond yield and the policy rate has indeed been in the negative territory (hence tight monetary policy) since March. 5-year bond yields are currently around 8.50%, which is very close to the policy rate of 8.25%. Hence, the CBRT does not have much room to cut unless there are fresh inflows to the Turkish bond market. Also lower rates could put pressure on the lira and jeopardize the credibility of CBRT and its disinflation program.”

FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 8.41%. For 2015, the panel expects the rate to decline to 8.72%. Meanwhile, FocusEconomics Consensus Forecast panelists see the marginal funding rate ending the year at 11.60%. For 2015, the panel expects the rate to decline to 10.63%.

Author: Ricard Torné, Lead Economist

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Turkey Monetary Policy Chart

Turkey Monetary Policy July 2014 0

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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