Turkey: Central Bank stays put in October; officials signal monetary conditions to remain tight for now
October 26, 2017
The Central Bank of the Republic of Turkey (CBRT) kept its monetary stance on hold at its 26 October policy meeting, as core inflation continued to deteriorate and the lira experienced a severe sell-off on the heels of a diplomatic spat between Turkish and U.S. officials. The Committee voted to hold the one-week repo rate steady 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 pressures to keep the main policy rates unchanged, was also held at 12.25%.
The press release that followed the meeting was slightly adjusted from the previous one to reflect recent high-frequency data, which points to yet another strong GDP outturn in the third quarter on the back of a healthy manufacturing sector, robust European demand and a positive base effect. However, with most tailwinds to growth already fading, the Bank opted to mention that “recent data confirm strong economic activity” rather than saying that “the recovery in economic activity has gained strength”, as it had following the previous meeting.
The most notable adjustments to the statement were concerning the Bank’s assessment of inflation. Officials acknowledged that recent surprises to the upside in both headline and core inflation posed a risk to pricing behavior, thus warranting the current tight monetary stance. Against a backdrop of worsening inflation expectations and the risk of a further weakening of the lira, the forward-looking sentences were updated to suggest that the CBRT will keep the policy tight for an extended period of time. The statement commented that the current stance “will be maintained decisively until inflation outlook displays a significant improvement and becomes consistent with the targets”.
All told, the Central Bank appears to have ruled out loosening monetary conditions in early 2018, when inflation is expected to trend lower on a strong base effect. Officials seem to be wary of upside risks including sticky services inflation, renewed weakness of the lira and the government authorities’ recent comments that fiscal stimulus measures may be implemented in 2018. Although the Bank is unlikely to hike rates any further—consumption demand already lost momentum in Q2—the Committee is keeping the door open for additional tightening were the aforementioned risks to materialize.
Author: David Ampudia, Economist