Turkey: Central Bank stands pat in June, keeps cautious rhetoric unchanged
June 15, 2017
The Central Bank of the Republic of Turkey (CBRT) held fire at its 15 June monetary policy meeting, halting the steady tightening in monetary conditions observed in the previous three meetings. The decision was in line with a firmer Turkish lira and a gradually improving inflation outlook. 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%. The closely watched late liquidity window rate, the main instrument used by the Bank’s officials in the recent past due to political pressure to keep the main policy rates unchanged, was also held at 12.25%. The decision was in line with market expectations.
The press release that followed June’s meeting was largely unchanged from the previous one, although the Bank was conspicuously more bullish regarding the country’s economic performance. The CBRT noted strong domestic demand dynamics and a pickup in demand from the European Union as the main reasons behind Q1’s strong growth, while it pointed to the government’s counter-cyclical measures as a further boost to growth in Q2. The CBRT was also distinctly more upbeat regarding the inflation outlook. It saw a better-performing lira and a partial correction in food prices as drivers behind the recent dip in inflation. Nonetheless, the partial nature of the correction suggests that the Bank does not believe the economy is out of the woods on the price front just yet.
The Bank struck a cautious tone on future monetary policy movements. The main forward-guidance sentence was unchanged, with the Bank specifying that a “tight stance in monetary policy will be maintained until the inflation outlook displays a significant improvement.” The CBRT also specified that it would engage in further monetary tightening were inflation dynamics to deteriorate. The Bank seems comfortable with a wait-and-see approach, as it awaits the right moment to normalize rates. At the very least, the robust GDP print in Q1 has reduced political pressure to loosen monetary conditions, giving officials more leeway to keep interest rates high until inflation eases notably.
Author: David Ampudia, Economist