Wednesday, January 16, 2019

Turkey maintains rate and tightening bias

     Turkey's central bank left its policy rate - the one-week repo rate - steady at 24.0 percent,  as expected, citing "some" improvement to the outlook for inflation but cautioned that risks to price still prevail and it will maintain its tight monetary policy stance until there is a "significant improvement" in the outlook for inflation.
      The Central Bank of the Republic of Turkey (CBRT), which has maintained its rate since raising its sharply in September as prices began to rise in response to the fall in the lira's exchange rate, reiterated its guidance from December that it was keeping a close eye on inflation expectations, prices, the lagged effect of past rate hikes and fiscal policy, confirming that "if needed, further monetary tightening will be delivered."
     Turkey's inflation rate has decelerated in the last two months and CBRT said the rebalancing of the economy was becoming more noticeable and import prices and domestic demand had helped improve the outlook for inflation.
      External demand was also maintaining its strength while economic activity was continuing to slow down, partly due to tight financial conditions. The improvement in the current account was expected to continue to improve, the central bank said.
      Headline inflation in December eased to 20.3 percent from 21.62 percent in November and a 15-year high of 25.24 percent in October but most analysts had expected the CBRT to keep its rate steady this month due to the tightening bias that has remained in place since September last year and to avoid any pressure on the lira.
      The CBRT's medium-term inflation target is 5.0 percent and last November the central bank raised its inflation forecast for 2019 to 15.2 percent from an earlier 9.3 percent and forecast inflation would decelerate to 9.3 percent by the end of 2020.
      September's 625-basis point rate hike came after two earlier hikes in May and June, with the policy rate rising by a total of 16 percentage points last year.
      The sharp hike in September came after the central bank in July kept its rate steady, disappointing financial markets and raising further doubts over CBRT's independence from political influence and its commitment to fighting inflation.
      After falling sharply in August, the September hike helped reverse the trend of the lira and since early December last year it has remained relatively stable.
      Today the lira was trading at 5.35 to the U.S. dollar, down a bit over 1 percent this year and down almost one-third since the start of 2018.

     The Central Bank of the Republic of Turkey released the following statement by its monetary policy committee:

"Participating Committee Members

Murat Çetinkaya (Governor), Ömer Duman, Uğur Namık Küçük, Emrah Şener, Murat Uysal, Abdullah Yavaş.
The Monetary Policy Committee (the Committee) has decided to keep the policy rate (one-week repo auction rate) constant at 24 percent.
Recently released data show that rebalancing trend in the economy has become more noticeable. External demand maintains its strength while slowdown in economic activity continues, partly due to tight financial conditions. Current account balance is expected to maintain its improving trend.
While developments in import prices and domestic demand conditions have led to some improvement in the inflation outlook, risks on price stability continue to prevail. Accordingly, the Committee has decided to maintain the tight monetary policy stance until inflation outlook displays a significant improvement.
The Central Bank will continue to use all available instruments in pursuit of the price stability objective. Inflation expectations, pricing behavior, lagged impact of recent monetary policy decisions, contribution of fiscal policy to rebalancing process, and other factors affecting inflation will be closely monitored and, if needed, further monetary tightening will be delivered.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days."


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