Turkey Monetary Policy April 2017


Turkey: Central Bank raises late liquidity window rate for a second meeting straight

April 26, 2017

At its 26 April monetary policy meeting, the Central Bank of the Republic of Turkey (CBRT) unexpectedly decided to increase its late liquidity window lending rate from 11.75% to 12.25%, while leaving its main policy rates unchanged. This represents the third tightening in as many meetings as CBRT officials attempt to boost the Turkish lira by means of hiking the rates of the late liquidity window, which is higher than Turkey’s three other key interest rates. As a result of the officials’ decision, the one-week repo rate was held at 8.00%, the overnight lending rate at 9.25% and the overnight borrowing rate at 7.25%. Analysts were confounded by the Bank’s decision to increase the late liquidity window lending rate as they had expected it instead to stay put in this month’s meeting.

Turkish policymakers have hiked the cost of lending for commercial banks to an over five-year high as a weak lira continues to stoke inflationary pressures. Double-digit inflation rose to the highest rate since April 2012 in March. However, the Bank has avoided raising the main interest rates, instead resorting to unconventional measures to tighten financial conditions. This has spurred concerns over the institution’s independence since President Tayyip Erdogan is fiercely opposed to interest rate hikes.

The Bank struck a hawkish tone on its assessment of the economy, reassuring its commitment to tighten the monetary stance further if the lira shows excessive volatility or inflationary pressures take longer than originally expected to recede. However, the CBRT was more optimistic this time around regarding inflation, highlighting newfound stability in the lira on the back of improving risk appetite. Officials also pointed out that upbeat sentiment driven by a stable currency, coupled with less uncertainty in the political arena and the government’s fiscal stimulus measures, have spurred economic growth prospects.

FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 8.71%. For 2018, the panel expects the rate to end the year at 8.66%. Panelists see the marginal funding rate ending the year at 10.13%. For 2018, the panel expects the rate to rise to 10.38%.

Author:, Economist

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Turkey Monetary Policy Chart

Turkey Monetary Policy April 2017

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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