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Turkey Monetary Policy July 2023

Turkey: Central Bank hikes again in July

On 20 July, the Central Bank of the Republic of Turkey (CBRT) decided to increase the one-week repo rate to 17.50% from 15.00%. The move marked the second consecutive hike and disappointed markets again; they expected a larger hike.

The CBRT reiterated that recent indicators suggest that underlying inflation is accelerating due to strong domestic demand and cost pressures. Moreover, it added that changes in tax regulations would put further pressure on inflation—in July, the government increased the VAT by 2.0% and tripled fuel taxes in order to reduce the fiscal deficit and fund earthquake reconstruction efforts. Accordingly, the Bank decided to hike again to initiate a disinflationary process and anchor inflation expectations. Additionally, the Bank reiterated its commitment to simplifying its micro- and macroprudential frameworks to reinforce market mechanisms and strengthen financial stability.

The Bank’s forward guidance remained hawkish. The CBRT stated that it would hike rates further as much as needed until achieving significant improvement in the inflation outlook. Notably, it reiterated that it would do so in a gradual manner. Our panelists expect the Bank to deliver additional hikes in the coming meetings.

The next meeting is scheduled for 24 August.

Fatih Akcelik, economist at JPMorgan, commented:

“The recent communication from the economy management suggests gradual tightening to avoid a recession ahead of the March 2024 local government elections. […] The authorities believe that FDI inflows from the GCC that would further improve external financing conditions (on top of tourism revenues) and allow the increase in foreign exchange reserves to continue and also contribute significantly to price stability. Taking into account that view, we do not expect significant tightening from the CBRT until the March 2024 local elections.”

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