Turkey: Central Bank stands pat in May
The Monetary Policy Committee of the Central Bank of Turkey held fire at its 6 May meeting, leaving the one-week repo rate unchanged at 19.00%. The decision marked the second consecutive hold and met market analysts’ expectations.
The move came amid a deterioration in inflation dynamics in recent months, with price pressures rising to a 23-month high of 17.1% in April. On one hand, the Bank noted that various factors such as demand and supply constraints as well as elevated expectations pose upside risks to the inflation outlook. Against this backdrop, the Bank raised the inflation forecasts in its April report, now expecting inflation to end this year at 12.2% (January report: 9.4%) and 2022 at 7.5% (January report: 7.0%). On the other hand, the Bank stated that it has begun to observe the decelerating impact of previous monetary policy tightening on credit growth and domestic demand. This should put downward pressure on prices ahead, supporting the Bank’s decision to continue its wait-and-see approach. Regarding the economy, the Committee stated that external demand has remained strong, but domestic demand has eased due to recently imposed restrictive measures, which have hit the services sector particularly hard. All in all, the Bank highlighted both downside and upside risks to the economic outlook revolving around progress on the vaccination front, further underpinning its decision to keep the rate steady.
The Bank struck a largely unchanged tone in the press release, after omitting any mention of possible further tightening after its previous meeting. It did, however, reiterate that “the policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect”.
Commenting on the outlook for monetary policy, Muhammet Mercan, chief Turkey economist at ING, stated:
“All in all, given the challenging inflation dynamics, fragile capital flows and the exchange rate outlook, the CBT has remained on hold this month, and has signalled caution in its policy actions. The inflation outlook will remain key in the near term. While it may have peaked […] with the April release, risks in the short term are quite significant and the expected disinflation could also be slower than what the CBT has envisaged. Given this backdrop, we expect the first cut will likely come in late 3Q.”
The next meeting is scheduled for 17 June.