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Turkey Monetary Policy August 2022

Turkey: Central Bank delivers unexpected rate cut in August despite very high inflation

The Central Bank of the Republic of Turkey (TCMB) delivered a shock rate cut at its 18 August meeting. The TCMB lowered the one-week repo rate by 100 basis points from 14.00% to 13.00%. Analysts expected the Bank to stand pat amid a backdrop of very high inflation domestically and monetary policy tightening globally. The Turkish lira slid in the wake of the announcement.

The Bank’s decision was driven by high-frequency data pointing to a loss of momentum in the economy. In the Bank’s view, “it is important that financial conditions remain supportive to preserve the growth momentum […] in a period of increasing uncertainties regarding global growth as well as escalating geopolitical risk”. Moreover, the TCMB stated that in its view “the updated level of [the] policy rate is adequate under the current outlook”. Although inflation continued to rise through July—reaching 79.6%—the drivers of greater price pressures are deemed by the Bank to be outside the scope of its influence. Furthermore, the TCMB expects its previously taken measures to lead to disinflation.

In the press release, the Bank struck a similar tone to that of its prior meeting. The TCMB reiterated its commitment to the “liraization strategy until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved”. However, the Bank’s unorthodox policy stance is seemingly achieving the opposite; the lira weakened in response to the decision. Yet, President Erdogan, who faces reelection in June 2023, remains a staunch opponent to interest rate hikes.

The next meeting is scheduled for 22 September.

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