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Turkey Monetary Policy November 2021

Turkey: Central Bank lowers borrowing costs in November, at the expense of the currency

The Monetary Policy Committee of the Central Bank of Turkey (CBRT) continued to ease its policy stance at its 18 November meeting, bringing the one-week repo rate down from 16.00% to 15.00%. The decision was largely in line with market analysts’ expectations, and came a day after President Erdogan vowed to continue fighting for cheaper borrowing costs, despite elevated price pressures. Following the president’s remarks, the lira tumbled to a new low and closed the day at TRY 10.63 per USD on 17 November, marking a 12.8% drop over the prior month. After the monetary policy announcement, the lira slid even further.

The decision was driven by the Bank’s assessment that the recent uptick in consumer prices has come on the back of “supply-side factors such as [a] rise in food and import prices, especially in energy, and supply constraints”. As such, the Bank anticipates inflation to enter a downward trajectory in the second half of next year. Regarding economic growth, the Bank noted robust domestic activity, in part thanks to external demand. This has also boosted the external sector’s performance as the current account balance has improved notably. The CBRT placed greater emphasis on the current account balance at this meeting, deeming it “important for the price stability objective“. Moreover, the Bank highlighted that its change in policy has had a positive impact on commercial loan growth, further supporting economic momentum.

The Bank reiterated that it “will continue to use decisively all available instruments until strong indicators point to a permanent fall in inflation and the medium-term 5.0% target is achieved in pursuit of the primary objective of price stability”. The Bank’s forward guidance suggested that it may hold rates at its next meeting on 16 December, although a no-change in December is not a forgone conclusion given the Bank’s greater focus on the current account balance. Our panelists are fairly split on the outlook for next year, although the Consensus is for a slight decrease in rates.

Muhammet Mercan, chief Turkey economist at ING, added:

“All in all, despite already elevated price and financial stability risks, rate cuts continued as widely expected in November, likely attributable to an objective of providing support to the real economy. In this environment, further TRY weakness can’t be ruled out—we’ve already seen close to a 30% increase in USD/TRY parity in recent weeks—creating additional cost-led pressures. Accordingly, the ex-post real policy rate is now deeply negative and is set to remain so next year. This environment will likely further deteriorate expectations and add to already high inflationary pressures.”

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