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Turkey Monetary Policy September 2021

Turkey: Central Bank delivers unexpected rate cut in September

At its 23 September meeting, the Monetary Policy Committee of the Central Bank of Turkey cut its one-week repo rate from 19.00% to 18.00%. The move largely took market analysts by surprise and brings the question over institutional independence back to the forefront, given President Erdogan’s frequent remarks that the interest rate should be brought down. Moreover, the move risks renewed pressure on the battered Turkish currency at a time when the economy has just begun to recover.

The decision to lower the interest rate reflected the Bank’s assessment that the recent increase in price pressures—inflation rose to an over two-year high of 19.3% in August—are of a transitory nature, stemming from higher food prices, supply-side constraints, a rise in administered prices and the loosening of restrictions. At the same time, the Bank noted that previous monetary tightening has led to a deceleration in credit growth—particularly a stronger-than-expected contraction in commercial loans—and therefore it felt that a reduction in the policy rate was necessary.

The Bank altered its tone in the press communiqué, removing the explicit statement that it would maintain a tight monetary policy stance, and dropping its commitment to keep the policy rate above inflation. Instead, it simply noted that it would “ continue to use decisively all available instruments until strong indicators point to a permanent fall in inflation and the medium-term 5% target is achieved”. As the decision took market analysts by surprise, participants in the FocusEconomics Consensus Forecast panel are currently assessing the latest developments. However, the change of tone in the accompanying press release suggests that the probability of further easing has increased.

The next meeting is scheduled for 21 October.

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