Central Bank of the Republic of Turkey Holds its Fire

January 19, 2016

World financial market volatility did not simmer down after Turkey’s Monetary Policy Committee meeting on December 22, so policymakers did not act on the conditional promise expressed in that meeting’s statement to the public that said, “should the decline in volatility observed after the start of the global policy normalization persist, monetary policy simplification steps would begin with the next meeting.”  The January meeting’s statement asserts that Turkish policy settings are already “tight,” deletes language about monetary policy simplification, and includes reasons for expecting lower inflation such as declining energy prices.  The benchmark one-week repo rate has been at 7.5% since a 25-basis point cut on February 24, 2015.  At that same time, the overnight lending and borrowing rates were sliced by 50 bps and 25 bps to their current levels of 10.75% and 7.25%.  This trio of monetary policy rates has been confusing and not very effective at bringing inflation, now hovering just below 9.0%, back down to the target of 5%.  A major inflationary force has been steep depreciation in the lira, and failure to support the lira and counter rising inflation with an interest rate hike has lifted inflation expectations and is further damaging investor confidence in Turkish monetary policy.  The perception is that central bank officials are kowtowing to pressure from the country’s authoritarian and anti-western prime minister, Recep Tayyip Erdogan.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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