Europe

Turkey’s Central Bank Keeps Interest Rates Steady

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Turkey’s Central Bank on Thursday kept its one-week repo rate — also known as the policy rate — steady at 19%, for a third month after raising it by 200 basis points in March.

After the sixth Monetary Policy Committee meeting this year, the bank said in a statement that “high levels of inflation expectations continue to pose risks to the pricing behavior and inflation outlook.”

On the other hand, it added that it is monitoring the decelerating impact of monetary tightening on credit and domestic demand.

Taking this into account, it said its current tight monetary policy stance will be maintained decisively until the significant fall in inflation forecast in its April Inflation Report is achieved.

The bank “will continue to use decisively all available instruments in pursuit of the primary objective of price stability,” it added.

“The policy rate will continue to be determined at a level above inflation to maintain a strong disinflationary effect until strong indicators point to a permanent fall in inflation,” it said.

In its April report, the bank raised the country’s year-end inflation forecast for this year to 12.2%, up from 9.4% in its previous report.

It also hiked the inflation forecast for 2022 to 7.5%, up from 7%, while keeping the 5% target for 2023.

Turkey’s annual inflation rate stands at 16.59% in May, down from 17.14% in April, according to the latest data from the Turkish Statistical Institute (TurkStat).

Domestic activity strong

The bank also pointed out that domestic economic activity is strong.

While domestic demand weakened slightly in the second quarter due to pandemic restrictions and tightening financial conditions, external demand remains strong, it added.

With the acceleration of domestic vaccinations facilitating recovery in the services and tourism sectors, the bank expects a more balanced composition in economic activity.

“Despite the rise in commodity prices, the strong upward trend in exports, the slowdown in credit growth, the significant fall in gold imports are expected to accelerate the ongoing improvement in the current account balance,” it noted.

Commenting on the bank’s decision, Timothy Ash, a senior emerging-market strategist at the London-based BlueBay Asset Management, said on Twitter: “No surprise here then. Rates stay on hold. But with US rates going higher, EMFX likely set to weaken in response.”

“Turkey’s central bank hiked more than expected March 18,” Robin Brooks, chief economist at the Washington-based Institute of International Finance, tweeted on Wednesday, saying the hike was likely a way to get ahead of a more hawkish Fed and higher longer-term US interest rates, “which is what is now playing out.”

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