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Turkey Monetary Policy July 2021

Turkey: Central Bank holds its ground in July

At its 14 July meeting, the Monetary Policy Committee of the Central Bank of Turkey left the one-week repo rate unchanged at 19.00%, in order to give previous rate hikes time to display their effects on inflation. The decision marked the fourth consecutive hold and met market analysts’ expectations.

In deliberating the decision, the Bank noted that supply shortages, rising import prices, demand conditions and elevated inflation expectations continue to pose risks to the inflation outlook. That said, it also highlighted that prior monetary policy tightening is beginning to have an effect on domestic demand and credit growth. On the growth front, the Bank reiterated that domestic activity remains strong, although momentum eased somewhat in the second quarter amid tighter Covid-19 restrictions. Additionally, an acceleration in the vaccination campaign is supporting activity in the services and tourism sectors, which in turn should underpin the economy and translate into a current account surplus going forward.

The Bank’s statement was largely unchanged from the prior meeting, noting that the “current tight monetary policy stance will be maintained decisively until the significant fall in the April inflation report’s forecast path is achieved”. Moreover, “the policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect”. That said, most panelists expect the Bank to cut the one-week repo rate by the end of the year amid moderating inflationary pressures.

The next meeting is scheduled for 12 August.

Commenting on the decision, Muhammet Mercan, chief Turkey economist at ING, stated:

“The Central Bank kept rates on hold and maintained its cautious stance on the back of challenging inflation dynamics, fragile capital flows and exchange rate outlook as well as vulnerability to a stronger USD and rising U.S. real yields. While the Bank still signals to move in late 2021, we think these risks factors could encourage the Bank to remain put for longer.”

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