Turkish Monetary Policy, July 2022

As expected, the Central Bank of the Republic of Turkey (TCMB) remained at its July 21 meeting. Consequently, the weekly repo rate remained unchanged at 14.00% despite inflation rising to 78.6% in June.

When discussing its decision, the Bank stated that inflationary pressures were caused by factors outside its sphere of influence. Namely, the war in Ukraine, disruptions in the supply chain and rising prices for raw materials. Moreover, TCMB reiterated that it “expects [the] the process of disinflation must begin against the backdrop of measures taken and decisively implemented.” The Bank also continued to highlight its efforts to promote greater liberalization of the economy in order to achieve price stability. Looking at the economy, TCMB noted that with the help of external demand, the Turkish economy grew strongly in the first half of 2022. However, the consequences of the war in Ukraine and the possibility of a recession in key trading partners “keep risks for [the] current account balance alive.

The Bank’s tone in the press release changed little from the previous meeting; he doubled down on liraization as a means of achieving a “permanent reduction in inflation”. While most panellists expect the central bank to stand its ground for the rest of this year, some expect a rise due to hot inflation. However, the president remains a vocal opponent of such actions.

Clemens Grafe, an economist at Goldman Sachs, added:

“Looking ahead, we expect policy rates to remain unchanged at +14.00% through 2023 and thus see real rates move into negative territory in Q4 2022, further boosting headline inflation and significantly undermine year-end inflation expectations. We project inflation to rise to +90% and only drop to +75% yoy at the end of 2022 with base effects.”

The next meeting is scheduled for August 18.

Last month, FocusEconomics panellists saw a weekly repo rate of 15.56% for 2022 end and 20.38% for 2023.