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Turkey Monetary Policy June 2023

Turkey: New Central Bank governor ignites tightening cycle in June

On 22 June, the first meeting after Erdogan’s reelection, the Central Bank of the Republic of Turkey (CBRT) decided to change its course of action, increasing the one-week repo rate to 15.00% from 8.50%. The decision to hike rates followed three consecutive holds, after an easing cycle starting in September 2021. The move underwhelmed markets, which were expecting a larger hike from the new governor, Hafize Gaye Erkan—who is perceived as market-friendly.

The Bank’s decision was motivated by recent indicators suggesting that underlying inflation is picking up due to strong domestic demand and cost pressures. Accordingly, the CBRT decided to hike to initiate a disinflationary process and anchor inflation expectations. Meanwhile, the Bank did not comment on the strength of the lira, but an 18.9% month-on-month depreciation of the currency on the day of the meeting likely provided further impetus for the hike. Unlike in previous meetings, the Bank did not explicitly mention its liraization strategy in its monetary policy communique—which aims to ensure the prevalence of the lira in the Turkish financial system via regulations on bank reserves and loans. Instead, it vowed to simplify its micro- and macroprudential framework with the aim of enhancing the performance of market mechanisms and strengthening financial stability.

The Bank’s forward guidance became markedly hawkish, stating that “monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in the inflation outlook is achieved”.

The next meeting is scheduled for 20 July.

Analysts at the EIU commented on the outlook:

“This initial increase in the policy rate will have little impact on market interest rates, inflation or economic activity. We expect Turkey to continue to raise rates significantly and take other steps in the direction of orthodox policies. However, there is a risk that the policy shift may not be vigorous enough to obviate the risk of an eventual foreign currency shortage.”

Meanwhile, Muhammet Mercan, chief economist at ING, commented on the Bank’s approach:

“The reason for the gradual approach seems to be the continuing political cycle. With upcoming municipal elections in March next year, a substantial loss of momentum in economic activity and possible strains in the labour market in the near term would not be a welcome development.”

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