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Turkey Monetary Policy April 2021

Turkey: Central Bank stands pat in April, but possible easing ahead

At its 15 April meeting, the Monetary Policy Committee of the Central Bank of Turkey (TCMB) left the one-week repo rate unchanged at 19.00%. The decision met market analysts’ expectations and followed the 200 basis-point rate hike on 18 March, which had come as a surprise.

The decision to hold fire reflected the Bank’s expectation that the current stance will have a larger impact on credit growth in the months ahead. Regarding the economy, the Bank stated that domestic activity is strong, despite the ongoing restrictions, but risks “exist in either direction”, further supporting its decision to take a wait-and-see approach. Turning to prices, upside risks to the inflation outlook remain on the back of recovering demand, elevated inflation expectations and supply constraints in some sectors.

In the press release, the Bank reiterated that it will continue to use all available instruments in order to achieve price stability. As such, “the policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is reached”. However, the Bank did omit the previous mention of possible further tightening if needed.

The meeting was the first under the governorship of Sahap Kavcioglu, who was appointed on 20 March after the sacking of Naci Agbal, following the aggressive rate hike delivered at the Bank’s previous meeting. All in all, while the TCMB stood pat in April, it is expected that the one-week repo rate will be lowered ahead, with a majority of panelists seeing a cut in the second quarter.

Muhammet Mercan, chief Turkey economist at ING, added:

“While the elimination of a reference to the end-2021 interim target signals a revision to this year’s inflation forecast in the upcoming inflation report released on 29 April, changes in the MPC statement regarding policy guidance show the possibility of a rate cut earlier than expected previously. However, challenging inflation numbers, fragile capital flows and the exchange rate outlook will likely keep the CBT cautious in its policy actions in the coming months. “

The next meeting is scheduled for 6 May.

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