Turkey: Central Bank maintains rates in March but sounds marginally more hawkish
The Central Bank of the Republic of Turkey (CBRT) stood pat at its 7 March monetary policy meeting, as officials maintained all rates in the Bank’s interest rate corridor scheme unchanged. The Bank’s decision was widely expected by market participants and was warranted by a recent deceleration in headline inflation—due to a sizeable base effect—and a more stable lira. The one-week repo rate was kept unchanged 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 held steady at 12.75%.
The communiqué that followed the meeting was mostly unchanged from January’s press release, with the only tweak being, however, a meaningful one. The press release included a reference to inflation momentum, as the CBRT stated that “underlying trend indicators display inertia and the core inflation remains elevated”. This suggests that policymakers are now more cautious regarding not only the short-term price outlook but also the path for inflation in the medium term, a sign that inflation could show more resilience to a deceleration than previously expected.
Despite the hawkish nature of the comment, which highlights increased risks of upside inflation surprises in the months to come, no other changes were made to either forward guidance statements or the policy stance. As such, the CBRT affirmed that a “tight stance in monetary policy will be maintained decisively until the inflation outlook displays a significant improvement […] and becomes consistent with the targets” and that “if needed, further monetary tightening will be delivered”.
Officials’ assessment of inflation—other than its medium-term outlook tweak—was also unchanged, with policymakers noting that inflation and inflation expectations continued to pose risks on the pricing behavior. The Central Bank omitted for a second consecutive month any mention of supply-side risks to inflation, including oil prices and renewed pressure on the lira. This showcases the CBRT’s optimist assessment of a firmer lira but does not incorporate the threats that structural weaknesses—mainly external—and persistent political pressure on the Bank’s decision-making processes still pose on the currency.
All in all, the CBRT fine-tuned its monetary policy communiqué to indicate that inflation could see a more moderate deceleration path ahead, but it failed to pre-emptively recalibrate its forward-looking guidance in response. The balance of risks to inflation remains heavily tilted to the downside, as another external or domestic shock should send the lira on a tailspin and test the Bank’s policy credibility. In that scenario, the Bank would be forced to act, although recent experience suggests that any response risks falling below market expectations. Additionally, this vicious cycle could be compounded by early elections, which would potentially see President Erdogan taking aim at the Bank and demanding lower interest rates to boost growth.