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Turkey Monetary Policy July 2022

Turkey: Central Bank holds fire as expected in July

As expected, the Central Bank of the Republic of Turkey (TCMB) stood pat at its 21 July meeting. Consequently, the one-week repo rate remained unchanged at 14.00% despite inflation rising to 78.6% in June.

In deliberating its decision, the Bank stated that inflationary pressures have been driven by factors outside its sphere of influence. Namely, the war in Ukraine, supply-chain disruptions and commodity price increases. Moreover, TCMB reiterated that it “expects [the] disinflation process to start on the back of measures taken and decisively implemented”. The Bank also continued to emphasize its attempts to foster greater liraization of the economy to achieve price stability. Looking at the economy, TCMB noted that with the help of external demand, the Turkish economy grew robustly in H1 2022. However, the fallout from the war in Ukraine and the possibility of a recession in key trading partners “keep the risks on [the] current account balance alive.”

The Bank’s tone in the press release was little changed from the prior meeting; it doubled down on liraization as the vehicle to achieve “a permanent fall in inflation”. While the majority of panelists expect the Central Bank to stand pat in the remainder of this year, some anticipate a hike due to red-hot inflation. However, the president remains a staunch opponent of such action.

Clemens Grafe, economist at Goldman Sachs, added:

“Looking ahead, we expect policy rates to remain unchanged at +14.00% until 2023 and thus see real rates moving deeper into negative territory into Q4 2022 – fueling headline inflation further and substantially derailing year-end inflation expectations. We forecast inflation to rise to +90% and only fall to +75%yoy at end-2022 with the help of base effects.”

The next meeting is scheduled for 18 August.

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