Turkey: Central Bank hikes rates by more than expected in June to tame inflation
June 7, 2018
At its monetary policy meeting held on 7 June, the Central Bank of the Republic of Turkey (CBRT) raised the one-week repo rate—which from 1 June became the main policy rate—from 16.50% to 17.75%. The move surprised market analysts, who had either expected the Bank to stay put or were banking on a more modest rate hike, and marks the third rate hike in as many months.
The Central Bank’s decision came soon after the Statistical Institute released data showing that inflation increased significantly in May to over 12%, more than double the Bank’s inflation target of 5%. In addition, the sustained depreciation of the lira since the start of the year and elevated inflation expectations will likely continue to fan price pressures in the coming months. Furthermore, the BCRT is trying to support the currency and rebuild its credibility as an independent institution, which was badly shaken in May after President Erdogan suggested he could take a more direct role in monetary policy following the 24 June elections. This confluence of factors caused the BCRT to opt for significant monetary tightening.
In its communiqué, the Bank made it explicitly clear that further monetary tightening would be delivered if necessary, and that the tight monetary stance would be maintained until the inflation outlook showed a “significant improvement”. However, despite the Central Bank’s recent willingness to raise rates, if President Erdogan is reelected there is still uncertainty over whether he would continue to grant the Central Bank full leeway to tighten policy to the degree required to bring inflation close to target. In addition, the government’s expansionary fiscal stance and the weak lira will continue to stoke prices, making it doubly difficult for the CBRT to tame price pressures.
Author: Oliver Reynolds, Economist