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TCMB delivers larger-than-expected rate cut in October, signals easing cycle will end in November

The Central Bank of the Republic of Turkey (TCMB) surprised market analysts by delivering a larger-than-expected 150 basis point rate cut, which brought the one-week repo rate down from 12.00% to 10.50% at its 20 October meeting. The decision pushed real interest rates deeper into negative territory but brought the one-week repo rate closer to President Erdogan’s year-end single-digit target.

Justifying the move, the TCMB noted that inflation—which rose to 83.5% in September—has chiefly been driven by factors outside the scope of monetary policy, including “the lagged and indirect effects of rising energy costs resulting from geopolitical developments, effects of pricing formations that are not supported by economic fundamentals, [and] strong negative supply shocks caused by the rise in global energy, food and agricultural commodity prices”.

That said, the Bank expects disinflation to commence on the back of macroprudential measures taken previously, “along with the resolution of the ongoing regional conflict”. Moreover, the Bank’s decision was reinforced by its prioritization of economic growth over price stability as it noted that the economy had begun to slow in H2.

The Bank explicitly stated that it will likely take similar action at the next monetary policy meeting before pausing the easing cycle. That said, the Bank reiterated that it is committed to using “all available instruments decisively within the framework of liraization strategy until strong indicators point to a permanent fall in inflation and the medium term 5 percent target is achieved in pursuit of the primary objective of price stability”.

The next meeting is scheduled for 24 November.

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

“[The] ongoing widening pressure on the current account and subdued capital flows imply the possibility of a further drawdown in reserves. Given that the current policy setting does not prioritise disinflation, inflation will likely remain elevated in the near term.”

FocusEconomics panelists see the one-week repo rate ending 2023 at 22.75% and 2024 at 25.00%.

Turkey - Money Data

2015   2016   2017   2018   2019  
Money (annual variation in %)17.4  17.6  15.5  19.4  26.6  

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Turkey Money Chart

Turkey Money
Note: Annual variation of M2 in %.
Source: Central Bank.

Turkey Facts

Value Change Date
Bond Yield12.00-0.09 %Dec 31
Exchange Rate5.95-0.85 %Jan 01

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