Turkey: Central Bank keeps rates unchanged in October
October 25, 2018
At its monetary policy meeting on 25 October, the Central Bank of the Republic of Turkey (CBRT) left the one-week repo rate unchanged at 24.00%, as most market analysts had expected. This followed a large rate hike in the prior month in response to rising inflation and the collapsing lira.
The Bank’s decision to stay put was likely motivated by the significant appreciation of the lira since the prior meeting, which should ease the pressure on the country’s corporates and lessen the pass-through effects on inflation. Moreover, domestic demand is weakening rapidly, as highlighted by the Bank in its press release, which should limit demand-push inflationary pressures. The CBRT could also have factored in the potential short-term effect of the government’s recent campaign to encourage stores to reduce prices by 10% in a bid to combat inflation. In addition, Muhammet Mercan, chief economist for Turkey at ING, highlighted “improvements in the geopolitical picture that will likely support the capital flow outlook, despite continuing fundamental macroeconomic challenges.”
In its communiqué the Bank stayed hawkish, and stated explicitly that it was prepared to deliver further rate hikes if required. The CBRT maintained its view that there were still “significant risks” to price stability—particularly in light of soaring inflation expectations and sky-high producer price inflation, which could filter through to higher CPI readings in the coming months, despite the government’s campaign.
Turkey Interest Rate Forecast
On balance, FocusEconomics Consensus Forecast panelists don’t see substantial further tightening going forward, but do expect interest rates to remain elevated throughout next year as the Bank tries to rein in inflation. Our panelists see the one-week repo rate ending 2019 at 19.97% and 2020 at 17.43%.
Author: Oliver Reynolds, Economist