August 27, 2014

At its 27 August monetary policy meeting, the Central Bank of the Republic of Turkey (CBRT) decided to maintain the one-week repo rate at 8.25%, as was expected by a majority of market participants. This decision contrasts the previous month’s 50 basis points cut and put an end to a three-month streak of key policy rate reductions. The Bank also left the borrowing rate unchanged at 7.50%. Conversely, the CBRT decided to narrow the interact rate corridor by lowering the marginal funding rate by 75 basis points to 11.25% and the overnight lending rate by the same amount to 10.75%.



The Bank’s accompanying statement noted that loan growth remains at reasonable levels due to the tight monetary policy and macroprudential measures and that private demand follows a modest course. Regarding price developments, the CBRT stated that while spillovers from a weak lira, that have been in place since mid-2013, are gradually fading, high food prices continue to dampen the country’s inflation outlook. In addition, the Bank highlighted potential risks stemming from the drought and geopolitical tensions.



Against these developments, the CBRT decided to symmetrize the interest rate corridor. As in previous statements, the Bank reaffirmed its tight monetary policy stance by, “keeping a flat yield curve” until there is a significant improvement in the inflation outlook.



Analysts believe that the change in the wording of the statement was important and that it implied a change in the Bank’s view. As Yarkin Cebeci, economist at J.P.Morgan, points out:



“The interest rate announcement note shows that the CBRT is more worried about the inflationary pressures and especially strong food prices. The CBRT no longer states that "demand composition will support disinflation and will lead to a significant improvement in CAD". The CBRT had been using this sentence for months. The omittance of this sentence and the inclusion of the weather-related and geopolitical risks suggest that the CBRT has become more cautious.”

FocusEconomics Consensus Forecast panelists see the one-week repo rate ending the year at 7.83%. For 2015, the panel expects the rate to rise to 8.89%. Meanwhile, FocusEconomics Consensus Forecast panelists see the marginal funding rate ending the year at 12.00%. For 2015, the panel expects the rate to decline to 11.75%.