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Turkey Monetary Policy April 2022

Turkey: Central Bank stands pat in April despite greater inflation risks

At its 14 April meeting, the Monetary Policy Committee of the Central Bank of the Republic of Turkey (TCMB) stood pat and left the one-week repo rate unchanged at 14.00%. The decision was in line with market analysts’ expectations. However, the real interest rate moved deeper into negative territory as inflation surged past 60% in March, with the Russia-Ukraine war weighing on the inflation outlook. Moreover, the Bank doubled down on its liraization strategy to lower price pressures.

In deliberating its decision, the TCMB noted that the war in Ukraine continued to add upside risks to the inflation outlook and downside risks to regional and global economic growth. The Bank reiterated its view that the recent rise in inflation is not due to economic fundamentals. Instead, it is driven by “rising energy costs resulting from geopolitical developments [and] temporary effects of pricing formations” as well as increased supply-chain disruptions due to the war. Further, the Bank still expects disinflationary forces to kick in going forward on the back of “measures taken and decisively pursued” and “the resolution of the ongoing regional conflict.” Regarding the economy, the Committee noted that high-frequency indicators continue to highlight robust economic activity. However, the Bank noted that external risks due to higher energy prices have risen, and that a “sustainable current account balance is important for price stability.”

In the press release, the Bank struck a similar tone and restated that it “will continue to use all available instruments decisively within the framework of liraization strategy until strong indicators point to a permanent fall in inflation and the medium-term 5.0 percent target is achieved in pursuit of the primary objective of price stability.” As such, the Bank is likely to refrain from interest rate hikes in the short term and instead focus its energy on fostering de-dollarization of the economy. That said, our panelists expect the Bank to commence a hiking cycle this year to rein in red-hot inflation, which is expected to remain very elevated this year.

The next meeting is scheduled for 26 May.

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