Turkey’s central bank, which is battling double-digit inflation, on June 15 kept its one-week repo (8%), overnight lending (9.25%) and borrowing (7.25%) rates on hold. The market was also not surprised by the national lender keeping the late liquidity window lending rate (12.25%) unchanged. The window has been used by commercial banks for about 90% of recent funding.
The central bank has in recent months tightened monetary liquidity via unorthodox measures, particularly by forcing Turkey’s banks to borrow through the window facility, which provides more expensive late liquidity.
The monetary regulator has been using the unorthodox policy rates corridor approach to maintain flexibility between dealing with fluctuations in the lira and ongoing political pressure to cut rates.
Sixteen economists surveyed by Reuters in advance of the central bank’s monetary policy meeting expected the central bank to keep its policy rates unchanged.
Following the bank’s rate decisions, the lira had lost 0.82% d/d to trade at 3.5153 per dollar as of 14:30 Istanbul time. The benchmark BIST-100 index was down 0.94% to 98,698.
Although recent improvements in cost factors and the expected partial correction in food prices will contribute to disinflation, the current elevated levels of inflation pose risks to pricing behavior, the central bank’s Monetary Policy Committee (MPC) said in a press release following its regular meeting held on June 15.
The central bank will maintain a tight stance on monetary policy until the inflation outlook displays a significant improvement. If need be, the MPC will deliver further monetary tightening, the central bank also reiterated on June 15.
The regulator expected Turkish economic activity to further accelerate due to supportive measures and incentives provided recently. The MPC assessed that the implementation of structural economic reforms would contribute significantly to potential GDP growth.
Turkey’s annual inflation rate slightly declined to 11.72% in May after hitting 11.87% in April, the highest level recorded since October 2008. The May inflation figure met expectations for a retreat from April's peak point. However, annual inflation is still rather high and political pressure on the central bank to cut policy rates amid high inflationary pressures increased following the April 16 referendum on introducing an executive presidency.
The rising food inflation trend on an annual basis continued in May. The annual increase in food prices hit 16.91% in the month versus the 2.47% seen in May 2016.
As inflation and exchange rate-related risks remain high, a direct increase in the policy rate is needed, the OECD said in its June Economic Outlook forecast as it raised its 2017 CPI inflation forecast for Turkey to 10.4% from its previous forecast of 7.7%, published last November.
Faced with a sharp exchange rate depreciation and rising inflationary expectations, the monetary stance has been tightened, but explicit increases in the main policy rate are warranted, the OECD also warned.
In April, Turkey’s central bank revised up its end-year inflation expectation for 2017 to 8.5% from its previous forecast of 8%. The World Bank is forecasting a quickening of annual inflation to 9% at the end of 2017 from last year’s 8.5%.