Turkey: Central Bank keeps policy on hold in January on improved currency and price dynamics
January 18, 2018
The Central Bank of the Republic of Turkey (CBRT) stayed put at its 18 January monetary policy meeting, as officials kept all rates in the Bank’s interest rate corridor scheme unchanged. The decision was largely expected by market participants, who saw in the recent decline in inflation and a more stable lira as sufficient reasons for the Bank not to tighten monetary conditions further at this month’s meeting. As a result, the one-week repo rate was held steady at 8.00%, the overnight lending rate at 9.25% and the overnight borrowing rate at 7.25%. The late liquidity window rate, through which all financing is currently delivered, was also steady at 12.75%.
The statement that followed the meeting was largely unchanged from the previous month’s press release, with minor tweaks largely attempting to reaffirm the Bank’s commitment to its current tight policy setting. Most forward-looking elements were kept intact, with officials stating that a “tight stance in monetary policy will be maintained decisively until the inflation outlook displays a significant improvement”.
This month, however, the Bank noted that any moderation in inflation warranting a softer policy stance should stem from underlying dynamics and not “base effects and temporary factors”. This suggests officials are looking beyond the expected base effect-driven deceleration in inflation that will take place up to April and aims at fending off the perception that the CBRT might consider already easing monetary conditions in H1.
The other noticeable alteration to the statement was the lack of mention to upside risks emanating from cost factors. Such a move likely reflected officials’ upbeat assessment of a firmer lira in recent weeks but omits other supply-side risks to inflation including oil prices and renewed pressure on the lira. The lira has strengthened recently due to strong global appetite for emerging markets’ assets, but structural weakness and lingering political pressure on the Bank’s policy actions could see another severe depreciation in the currency’s value.
On the growth front, the CBRT still sounded upbeat, stressing that economic activity remains strong on the back of solid domestic and external demand. On inflation, the Committee continued to see current levels of inflation and unanchored inflation expectations as risks on the pricing behavior, vindicating the Bank’s tight monetary stance.
All told, the CBRT seems comfortable with recent developments—strong global sentiment, a stable lira and weaker price pressures—and is likely to maintain its current tight stance for the time being. The Bank, however, could be forced to act and increase interest rates further in face of another external or domestic shock and its ensuing effect on the lira.
Author: David Ampudia, Economist