Turkey: Central Bank holds fire in June amid recovering economy and lira weakness
June 25, 2020
The Central Bank stood pat at its 25 June meeting and kept the one-week repo rate at 8.25%—the lowest level since before the country’s 2018 currency crisis. The decision, took market analysts by surprise—they had expected another 25 basis-point cut—and marked a pause to the near year-long easing cycle. Earlier, on 20 June, the Central Bank revised rules linking the reserve requirement ratios to loan growth, suspending until year-end the rule for banks to have adjusted real loan growth rates below 15%. This should provide banks with some flexibility to meet loan demand while reaping the benefits of more beneficial reserve requirements, and thus improving liquidity in the banking sector.
The decision to keep rates unchanged likely reflected a wait-and-see approach to assess the impact of previous rate cuts. The Bank expects disinflation to become more pronounced in the second half of the year as low commodity prices and weakened aggregate demand restrain price pressures, and keeping rates unchanged should ensure this disinflationary trajectory continues. Moreover, the monetary authority noted that the economy began to recover in May due to “gradual steps towards normalization” and that “recent monetary and fiscal measures contribute to financial stability and economic recovery”, reducing the need for further stimulus. In addition, given that the Turkish depreciated 13.2% against the USD year-to-date on 24 June, the latest decision likely in part reflected attempts to prevent further weakening of the lira, which would negatively impact the real economy.
In its press release, the Central Bank struck a relatively unchanged tone and reaffirmed the need for a “cautious” monetary stance to maintain disinflation. On balance, our panelists expect further easing this year to combat the fallout from Covid-19 and kickstart the economy.
The next monetary policy meeting is scheduled for 23 July.
Author: Jan Lammersen, Economist