Turkey Monetary Policy

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Turkey: Central Bank unexpectedly cuts key policy rate

May 22, 2014

At its 22 May monetary policy meeting, the Central Bank of the Republic of Turkey (CBRT) cut the one-week repo rate by 50 basis points to 9.50%. This unexpected move marked the first policy change since January. The Bank, however, decided not to change its overnight rate corridor; it left the marginal funding rate at 12.00% and the borrowing rate at 8.00%. Moreover, the CBRT maintained the overnight lending rate for primary dealers at 11.50%.

The Central Bank decided to reduce its key policy rate as interest rates have fallen across all maturities due to the, “recent decline in uncertainties and partial improvement in in the risk premium indicators.” Despite the rate cut, the Bank stated that its monetary policy stance will continue to be tight. In addition, the Bank vowed to closely monitor inflation expectations and “other factors that affect inflation” and affirmed that the monetary policy stance will be tight until there is a significant improvement in the inflation outlook.

Regarding economic developments, the Bank indicated that private final domestic demand has moderated slightly due to the Bank’s tight monetary stance. However, the Bank foresees a recovery in external demand, which will significantly reduce the current account deficit.

The unexpected rate cut has triggered concerns over the Bank’s next move. According to Yarkin Cebeci, economist at J.P.Morgan:

We think that the CBRT will enter a wait and see mode after today’s decision. The Bank will most probably monitor for some time how the currency and credit markets react to the decision and how the global risk appetite plays out. Hence we do not expect another cut in June. However, provided that the risk appetite remains strong and the lira remains stable, the Bank will likely deliver another 50bp cut either before the presidential elections (ie in July) or shortly afterwards (ie in September).

While inflation continues to rise, the Central Bank’s efforts to curb price pressures are severely undermined by Erdogan’s demands for steeper rate cuts. Erdogan classified May’s rate cut as a “mockery” and urged the Central Bank to adopt more aggressive rate cuts. This puts monetary authorities in a difficult position, as any additional rate cuts over the next months may signal markets that the Bank heeds to political pressure and erode its reputation as an independent policy marker.

FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 10.00%. For 2015, the panel expects the rate to decline to 9.89%. Meanwhile, FocusEconomics Consensus Forecast panelists see the marginal funding rate ending the year at 11.86%. For 2015, the panel expects the rate to decline to 11.58%.


Author: Ricard Torné, Head of Economic Research

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Turkey Monetary Policy Chart


Turkey Monetary Policy May 2014

Note: 1-week repo rate, overnight borrowing rate and marginal funding rate in %.
Source: Central Bank of the Republic of Turkey (CBRT).


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