Turkey Monetary Policy


Turkey: Central Bank maintains key rates; hikes reserve requirement ratios on foreign currency

December 24, 2014

At its 24 December monetary policy meeting, the Central Bank (CBRT) decided to maintain the one-week repo rate at 8.25%. The decision was broadly expected by the market. The Bank also left the borrowing rate unchanged at 7.50%, the marginal funding rate at 11.25%, and the interest rate on borrowing facilities provided for primary dealers at 10.75%.

Similar to its previous statement, the Central Bank pointed out that loan growth remains at reasonable levels against a backdrop of tight monetary policy and macroprudential measures. Regarding external developments, the Bank stated that global demand is still weak, but that favorable terms of trade will continue to contribute to rebalancing the current account. Domestically, monetary authorities recognized that the structural reforms recently adopted by the government will help increase potential growth.

Regarding consumer price developments, the Central Bank underscored that the current monetary policy stance is keeping inflation pressures contained and that falling commodity prices will contribute to disinflation. Against this backdrop, the CBRT stated that inflation will decline throughout 2015. That said, the Bank reaffirmed its tight monetary policy stance by, “keeping a flat yield curve, until there is a significant improvement in the inflation outlook.” The next monetary policy meeting is scheduled for 20 January.

On 3 January, the Central Bank unexpectedly increased the reserve requirement ratio on foreign exchange for banks and financial institutions in an attempt to support financial stability amid a weakening lira. The average reserve requirement ratio for foreign currency will thus increase from 11.7% to 12.8%. According to the CBRT, this move would add approximately USD 3.2 billion to the reserves. As Yarkin Cebeci, economist at J.P.Morgan, points out:

“Although the main aim is to extend the maturity of noncore liabilities, the decision still corresponds to a real monetary tightening. […] We view this as a credible measure towards maintaining financial stability. More importantly, the move shows that the CBRT remains cautious and is ready to take measures towards achieving its dual targets of financial and price stability. This could help to increase the CBRT’s credibility.”

FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 8.17%. For 2016, the panel expects the rate to rise to 8.47%. Meanwhile, FocusEconomics Consensus Forecast panelists see the marginal funding rate ending the year at 11.36%. For 2016, the panel expects the rate to increase to 12.20%.

Author: Ricard Torné, Lead Economist

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Turkey Monetary Policy Chart

Turkey Monetary Policy December 2014 0

Note: 1-week repo rate, overnight borrowing rate and marginal funding rate in %.
Source: Central Bank of the Republic of Turkey (CBRT).

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