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Turkey Monetary Policy October 2023

Turkey: Tightening cycle continues in October

On 26 October, the Central Bank of the Republic of Turkey (CBRT) raised the one-week repo rate to 35.00% from 30.00%, matching the previous month’s hike. The move marked the fifth consecutive increase and was in line with market expectations. Since June 2023, the CBRT has cumulatively increased its key policy rate by 2,650 basis points—its sharpest hiking cycle on record.

The CBRT noted that inflation came in above expectations in Q3. While it reiterated that inflationary pressures stemming from taxes, wages and currency weakness had already largely passed through prices, it also highlighted that strong domestic demand, sticky services inflation and rising inflation expectations remained key drivers of price pressures. The CBRT added that recent geopolitical developments—likely a reference to the conflict between Israel and Hamas—pose risks to the inflation outlook via fluctuations in oil prices. Against this backdrop, the Bank decided to hike again in a bid to anchor inflation expectations and restart the disinflationary process as soon as possible.

The Bank’s forward guidance remained hawkish. The CBRT reiterated that it would tighten monetary conditions as much as needed to achieve a significant improvement in the inflation outlook, while maintaining its gradual approach. As such, our panelists expect additional hikes in the coming quarters. The next Monetary Policy Committee decision is scheduled for 23 November.

Clemens Grafe and Basak Edizgil, analysts at Goldman Sachs, said: “Given the signs that the TCMB [CBRT] is placing a higher weight on the inflation gap in its reaction function and the continued increase in inflation in the near term, we expect the Bank to continue the hiking cycle in the remainder of the year.” Meanwhile, analysts at the EIU commented on risks to the outlook: “Despite fears of intervention from the President, Recep Tayyip Erdogan, who has a strong preference for ultra-low rates, the Central Bank has continued to raise rates consistently. It may deliver one or two more rate rises of up to 500 basis points by end-2023. A risk persists that policy tightening will be suspended or even reversed ahead of the local government elections in March 2024 or in the event of a very sharp slowdown in economic activity.”

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