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Turkey Monetary Policy February 2021

Turkey: Central Bank leaves rates unchanged in February

At its 18 February meeting, the Monetary Policy Committee (MPC) of the Central Bank of Turkey left the one-week repo rate unchanged at 17.00%. The decision marked the second consecutive hold and was in line with market expectations.

The hold came amid still-elevated inflationary pressures due to strengthening domestic demand, exchange rate effects and heightened inflation expectations. Although the Bank expects the impact of previous policy tightening to become more pronounced ahead, leading to easing price pressures, it maintained its wait-and-see approach as rising commodity prices, supply disruptions in some sectors, and wage and price adjustments continue to weigh on the medium-term outlook. Regarding the economy, the MPC stated that activity is firming strongly, but that restrictive measures and short-term uncertainty are still dragging on the recovery, particularly in the services sector.

In the press release, the Bank maintained its hawkish tone, stating that it will keep its current stance “for an extended period until strong indicators point to a permanent fall in inflation and price stability” and its inflation target of 5% is reached. This signaled policy will remain tight in the medium term.

The appointment of Naci Agbal as governor of the Central Bank in early November last year, together with the change of leadership in the finance ministry, indicated a return to more orthodox and predictable policy making. This has strengthened the local currency against the U.S. dollar, with the lira appreciating 6.6% on 17 February in year-to-date terms. As such, Muhammet Mercan, chief Turkey economist at ING, added: “The decision can also be attributed to ongoing strength in the Turkish lira and an improvement in the risk premium.”

Mercan continued:

“All in all, the CBT has remained decisive on keeping a tight stance for longer, while also leaving an open door for more hikes. So the bank will continue to be cautious in the near term given not only inflationary pressures, but also concern about the level and composition of reserves, high dollarisation and the need to maintain capital flows and be ready to deliver, especially in case of further upside inflation surprises.”

Seda Guler Mert, principal economist at BBVA Research, commented that BBVA are more prudent on the expected disinflation path than the Central Bank “due to the stickiness in inflation led by high inertia and supply side factors”. Consequently, they expect “consumer inflation to end the year at 10.5% and forecast the CBRT to start only a gradual easing cycle in 4Q21 and reduce [the] policy rate to 14% at the end of the year”.

The next monetary policy meeting is scheduled for 18 March.

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