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Turkey Monetary Policy January 2022

Turkey: Central Bank stands pat in January

At its first meeting of the year on 20 January, the Monetary Policy Committee of the Central Bank of Turkey held fire and left the one-week repo rate unchanged at 14.00%. This marked the first no-change decision since the Bank embarked on its easing cycle in September last year, and was in line with market analysts’ expectations.

In deliberating its decision, the Bank noted that the recent rise in inflation has been driven by “distorted pricing behavior due to unhealthy price formations in the foreign exchange market, supply-side factors such as the rise in global food and agricultural commodity prices, supply constraints, and demand developments”. Meanwhile, the Bank expects inflation to decline ahead on the back of a base effect and prior policy action. Regarding the economy, the Bank stated that the “level of capacity utilization and other leading indicators show that domestic economic activity remains strong, with the help of robust external demand”.

In addition, the Bank added a sentence on prioritizing the Turkish lira to foster price stability. This follows the government’s announcement in December of the creation of TRY-denominated time deposits, which are protected against currency depreciation. On 29 December and 11 January, the Bank announced incentives to convert gold and FX savings, respectively, into lira deposits.

The Bank reiterated that it “will continue to use decisively all available instruments until strong indicators point to a permanent fall in inflation and the medium-term 5.0% target is achieved in pursuit of the primary objective of price stability”. This further suggests that the easing cycle might have come to a temporary end, after December’s suggestion that the cumulative impact of prior action will be monitored in the first quarter of this year.

The next meeting is scheduled for 17 February.

Muhammet Mercan, chief Turkey economist at ING, added:

“The Bank seems to have adopted a wait-and-see attitude following the introduction of its FX deposit scheme, which is intended to increase household demand for savings in Turkish lira by reducing FX risk. […] Given the latest hikes in electricity, gasoline and natural gas prices, inflation will likely remain under pressure in the near term and well above the latest reading until late 2022. […] So the inflation outlook and recent decline in CBT reserves will not leave any room for further policy easing in the near term, in our view.”

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