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Turkey Monetary Policy May 2022

Turkey: Central Bank holds fire despite red-hot inflation and increased risks

The Monetary Policy Committee of the Central Bank of the Republic of Turkey (TCMB) stood pat at its 26 May meeting. The one-week repo rate was left unchanged at 14.00%, in line with market analysts’ expectations. Consequently, the real interest rate dived deeper into negative territory, as inflation came in at 70% in April. Moreover, the Bank reiterated its intent to foster greater liraization of the economy. The lira has, however, been under significant pressure recently.

In explaining its decision, the Bank noted that higher energy and agricultural commodity prices on the back of the war in Ukraine and supply chain issues have pushed up price pressures. That said, the Bank expects inflation to decrease due to a supportive base effect, an expected end to the military conflict between Ukraine and Russia, and its prior monetary policy measures. Regarding the economy, the Committee noted that high-frequency data pointed to robust economic activity, aided by the external sector. However, a greater energy import bill is a cause for caution. as current account balance risks have increased. A “sustainable current account balance is important for price stability”, the Bank noted.

The Bank’s tone was largely unchanged from the prior meeting, reiterating that it “will continue to use all available instruments decisively within the framework of liraization strategy until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved”. Our panelists expect the Bank to commence a rate-hiking cycle amid scorching inflation and further upside risks to the inflation outlook.

The next meeting is scheduled for 23 June.

Muhammet Mercan, chief Turkey economist at ING, commented:

“Inflation […] maintained a rapid uptrend […] given the broad-based deterioration in price dynamics with a largely supportive policy framework and the Russia/Ukraine war pressuring import prices. While the current outlook requires a significantly tighter monetary policy stance, the CBT does not signal a shift in the near term, remaining mute again in May and signalling the continuation of the same policy line.”

Deniz Çiçek, economist at QNB Finansbank, expects a more aggressive monetary policy tightening than the majority of analysts on the FocusEconomics panel. He explained:

“The CBRT’s policy rate stands much lower than the inflation realizations and the medium-term inflation expectations. In an open economy this cannot sustain as equilibrium. The negative real interest rate amplifies the pressure on TRY stemming from the current account deficit, the tightening global monetary policies and the rise in the risk premium.  The negative real interest rate also stimulates loan growth, which can create more pressure on inflation and the current account deficit. Unless the global conditions improve significantly, stabilizing macroeconomic conditions will require an aggressive monetary policy tightening to align the interest rates with the inflation expectations. “

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