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Turkey Monetary Policy August 2021

Turkey: Central Bank stands pat in August

The Monetary Policy Committee (MPC) of the Central Bank of Turkey (CBRT) held fire at its 12 August meeting, leaving the one-week repo rate unchanged at 19.00%.The decision was in line with market analysts’ expectations.

The Bank’s decision was driven by risks to the inflation outlook. On one hand, the MPC noted that previous monetary tightening has had the desired effect on domestic demand and credit growth. However, import costs and administered prices have increased recently. In addition, supply constraints in certain sectors, the effect of looser Covid-19 restrictions, and elevated inflation expectations continue to negatively impact the inflation outlook. As such, the CBRT opted to maintain its tighter stance. Regarding the economy, the Bank stated that leading indicators show activity remains strong in the third quarter, aided by external demand and the vaccine rollout. The progressing vaccination drive should underpin activity in the services and tourism sectors, balancing the economy and driving a current account surplus.

The Bank’s statement was largely unchanged from the prior meeting, with the MPC stating that “taking into account the high levels of inflation and inflation expectations, the current tight monetary policy stance will be maintained decisively until a significant fall in the inflation report’s forecast path is achieved”. Moreover, “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”.

That said, the vast majority of our panelists expect the Bank to ease its stance by the end of the year. This likely reflects the impact of political interference, with President Erdogan calling for a rate cut in early August ahead of the meeting. This sent the lira tumbling again, posing an upside risk to the short-term inflation outlook through FX pass-through. Moreover, our panelists continue to forecast double-digit inflation through next year, although it is seen coming down from its current level.

The next meeting is scheduled for 23 September.

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