Turkey: Central Bank leaves key rates unchanged, publishes roadmap for policy simplification
August 18, 2015
At its 18 August monetary policy meeting, the Central Bank (CBRT) decided to maintain the one-week repo rate unchanged at 7.50%. The decision was broadly in line with market expectations. The Bank also decided to keep the borrowing rate at 7.25%, the marginal funding rate at 10.75%, and the interest rate on borrowing facilities provided for primary dealers at 10.25%.
Mirroring the previous statement, the CBRT commented that amidst a backdrop of tight monetary policy and macro-prudential measures, loan growth remains at moderate levels. The Bank added that even though external demand is still weak, domestic demand is contributing to modest growth. In addition, the Bank pointed out that the implementation of the announced structural reforms will support growth notably. Regarding external developments, the Bank reiterated that favorable terms of trade and the moderate path of consumer loans continues to support an improvement in the current account balance.
Regarding consumer price developments, the Central Bank stated that food and energy price developments are moderating inflationary pressures; however, this favorable effect is delayed by exchange rate movements. The Bank added that considering this delay and high levels of uncertainty in domestic as well as global markets, the CBRT decided to adopt a tighter liquidity policy for as long as deemed needed.
Looking forward, the Bank commented that, “future monetary policy decisions will be conditional on the improvements in the inflation outlook.” Moreover, the Bank reaffirmed its tight monetary policy stance by stating it will keep, “a flat yield curve, until there is a significant improvement in the inflation outlook.” The next monetary policy meeting is scheduled for 22 September.
Along with the monetary policy announcement, the Bank published a roadmap for policy simplification, which is to be implemented before and after global monetary policy normalization. Yarkin Cebeci, Economist at JPMorgan elaborates:
The document incorporates measures that are policy-neutral. That is, the CBRT is aiming to simplify its policy framework without providing any evidence on the need for monetary tightening. Again, the CBRT sounds unfazed by the recent market moves and this should also be ill-received by the markets. Although the CBRT keeps rates unchanged and adopts a neutral rhetoric, we think that the CBRT may be forced to take action if the lira remains under pressure. This could be in the form of an earlier than planned start to policy simplification, meaning the CBRT may be forced to hike the lower band and the policy rate and thus narrow the corridor. However, if the pressure is strong then the Bank could also be forced to hike the upper band of the corridor.
The roadmap follows the 30 July announcement by Central Bank Governor Erdem Basci that the Bank is considering moving to a more simplified policy rate in the future. Basci has highlighted that the move is not related to the monetary policy stance but to increase confidence and investment levels in Turkey. Investors have criticized the complexity of Turkey’s monetary policy regime, which uses three separate interest rates and has been in place since 2010.