Turkey cuts rate 4th time but to pause and assess in Q1

     Turkey's central bank lowered its main interest rate for the fourth month in a row but said it would now pause while it monitors the impact of recent policy decisions during the first quarter of next year when it will consider all aspects of its policy framework "to create a foundation for a sustainable price stability."
      The Central Bank of the Republic of Turkey (CBRT) cut its policy rate, the one-week repurchase auction rate, by another 100 basis points to 14.0 percent and has now cut it 5 percentage points following cuts starting in September though today.
      The easing of monetary policy - which began after the current governor Sahap Kavcioglu was installed in March by Turkish President Tayyip Erdogan - reversed a monetary tightening cycle that was begun under the previous governor to curb rising inflationary pressures.

     "The Committee decided to complete the use of the limited room implied by transitory effects of supply-side factors and other factors beyond monetary policy's control on price increases and reduced the policy rate by 100 basis points," the bank's monetary policy committee said.

      Today's rate cut was expected after CBRT in November said it would consider completing the use of the limited room to lower interest rates in light of the transitory impact on inflation and Erdogan's repeated call for lower interest rates as part of what he says is the country's "economic war of independence."

     In November the central bank also said it expected the transitory effects on inflation to persist through the first half of 2022 but omitted this reference today.

     However, CBRT reiterated it would "decisively" use all available instruments until data points to a permanent fall in inflation and the 5.0 percent inflation target is achieved.

     Turkey's inflation rate rose to 21.3 percent in November form 19.9 percent in October and 15 percent in January this year.

Turkey cuts rate 2nd time, limited room for more cuts

      Turkey's central bank cut its key interest rate for the second month in a row by much more than expected, dealing another body blow to the lira's exchange rate, and said there was "limited room" for further rate cuts during the remainder of this year.

     The Central Bank of the Republic of Turkey (CBRT) cut its policy rate, the one-week repo auction rate, by another 200 basis points to 16.0 percent following a 100-point cut in September, when the rate was cut for the first time in two years.

     The rate has now been cut by 300 points since the current central bank governor, Sahap Kavcioglu, was installed by Turkey's strong-willed president, Tayyip Erdogan, in March after his predecessor Naci Agbal became the third governor to be fired in less than two years.

      The rate cut was twice the amount expected by analysts and comes only a few days after the Turkish Industry and Business Association in a report called for a fundamental reform of economic policy making, - a diplomatic but still a clear critique of Erdogan - and underlined the importance of an independent central bank for the country's long-term economic growth and development.

      The Turkish lira continued to plummet to new record lows, falling another 1.6 percent in the aftermath of the rate cut to 9.43 to the U.S. dollar.

      Since March 20, when Kavcioglu took over the central bank, the lira has lost 22 percent of its value against the dollar to be down 22 percent this year and down 37 percent since the start of 2020.

      The fall in the lira illustrates how foreign investors are turning their backs on Turkey, with data from the Institute of International Finance (IIF) earlier today showing capital flows into Turkish bonds and stocks falling since the September rate cut.

      The rate cut comes despite the steady rise in Turkey's inflation rate, which is now almost four times the bank's medium-term target of 5.0 percent.

      Headline inflation rose to 19.6 percent in September, the highest rate since March 2019, from 19.25 percent in August while core inflation - which Kavcioglu recently has emphasized - rose to 16.98 percent from 16.76 percent.

      CBRT said the recent rise in inflation was driven by higher food and import prices, especially energy, along with supply-side constraints, higher administered prices and stronger demand.

     "It is assessed that these effects are due to transitory factors," the bank said, adding the impact of past monetary tightening was having a dampening impact on credit and domestic demand along with commercial loans and personal loan growth.

      As in September, the central bank said it would "continue to use decisively all available instruments" until there is a permanent fall in inflation and the medium-term inflation target is achieved.

     "Nevertheless, the Committee assessed that, till the end of the year, supply-side transitory factors leave limited room for the downward adjustment to the policy rate," CBRT said.

     Turkey's economy has continued to grow since the second quarter of last year, with its gross domestic product up 21.7 percent year-on-year in the second quarter of this year from 7.2 percent in the first quarter.

     "Leading indictors show that domestic economic activity remains strong, with the help of robust external demand," CBRT said, adding domestic vaccinations have helped a recovery of services, tourism and related sectors.

Turkey surprises with rate cut, lira hits new record lows

     Turkey's central bank lowered its policy rate for the first time in two years, surprising many but not all analysts, saying a revision of its monetary policy stance was needed as past monetary tightening was now dampening credit, domestic demand and commercial loans.
     The Central Bank of the Republic of Turkey (CBRT) cut its policy rate, or the one-week repo auction rate, by 1 percentage point to 18.0 percent in the first rate cut since September 2019.

      Despite recent comments by the bank's governor, Sahap Kavcioglu, the vast majority of analysts expected the central bank to maintain its rate today as Turkey's headline inflation is continuing to accelerate and the bank had pledged to keep rates above inflation.

      However, in a conference call with investors on Sept. 1, Kavcioglu omitted earlier pledges of keeping the policy rate above inflation and that tight monetary policy would be maintained decisively.

      A week later, Kavcioglu - who was appointed in March by Turkey's strong-willed president, Recep Tayyip Erdogan - then shifted the bank's policy focus to core inflation, which some analysts saw paving the way for lower interest rates as demanded by Erdogan.

     In retrospect, these hints by Kavcioglu - the bank's fourth governor since 2019 - turned out to foreshadow today's sharp change in policy. 

     Kavcioglu was appointed by Erdogan on March 21 this year after he fired Naci Agbal, who had raised the rate for the third time on March 18.

     Reflecting today's surprise policy decision, the Turkish lira once again fell to new record lows, ensuring continued upward pressure on import prices and thus inflation.

     The lira plunged 1.25 percent after the rate cut to 8.77 to the U.S. dollar to be down 15.3 percent this year and down 32 percent since the start of 2020.

      Explaining its decision to lower the policy rate, the bank's monetary policy committee said monetary tightening had a decelerating impact on credit and domestic demand, and a higher-than-expected contractionary effect on commercial loans.

     Turkey's headline inflation rate rose to 19.25 percent in August, up from 14.97 percent in January and 18.95 percent in July - almost four times the bank's 5.0 percent medium-term target.
      But core inflation, which strips out energy, food, alcohol and tobacco, eased to 16.7 percent from 17.21 percent in July and from a 2021-high of 17.77 percent in April.

      Formalizing the bank's abandonment of its earlier guidance, the policy committee today said it would use all available instruments until there are strong signs inflation is declining and the 5.0 percent inflation target is achieved.

      In its August statement the committee had said it would maintain a tight monetary policy stance decisively until there is a significant fall in inflation and the policy rate would be set above inflation.

      Despite the change to the guidance and surprise to financial markets, the committee said it would continue to "take its decisions in a transparent, predictable and data-driven framework."

Turkey holds rate but softens hawkish policy stance

      Turkey's central bank maintained its key interest rate and "tight monetary policy stance," as widely expected, but dropped its earlier commitment of maintaining this stance for an extended period and that it could even raise rates further, signaling a clear softening of its hawkish tone.
      Instead of its previous pledge of keeping a tight policy stance "decisively" and for an extended period, the Central Bank of the Republic of Turkey (CBRT) today said it would use "decisively" all instruments in pursuit of price stability and the policy rate would be set above inflation to maintain a disinflationary effect until there is a permanent fall in inflation and the medium-term inflation target is reached.
     The shift in tone comes after a highly anticipated first monetary policy meeting under its new governor - the bank's fifth in the last decade - and the verdict by the foreign exchange market was swift.
     The Turkish lira immediately fell just over 1 percent to 8.133 to the U.S. dollar, before recovering some of its loss to 8.09 but continuing the slide since March 21 when current governor Sahap Kavcioglu took over after his predecessor, Naci Agbal was fired by Turkey's strong-will president, Tayyip Erdogan.   

     Agbal was the third governor to be let go by Erdogan since Murat Cetinkaya was fired in 2019 and Murat Uysal was fired in 2020, repeatedly unsettling investors who increasingly doubt the central bank's commitment to fight inflation under the leadership of Erdogan.

    Turkey's inflation rate has been volatile in the last few years, mainly due to the impact of the lira's exchange rate.

     After plunging from over 100 percent in January 1998 to below 8 percent in 2005, inflation in Turkey was relatively contained below 10 percent for more than a decade when the lira's decline was relatively steady.

    But in early 2018 the lira's decline picked up speed and then plunged in July and August that year, a move Cetinkaya responded to by raising interest rates sharply, helping reverse some of the lira's losses, while inflation spiked to 25.24 percent in October 2018.

     Inflation remained close to 20 percent for the next six months but the impact of the high interest rates and a relatively steady lira helped push down inflation to 8.55 percent in October 2019.

     But the arrival of COVID-19 last year undermined the lira's stability and it lost almost 20 percent of its value in 2020 though its fortunes appeared to have changed in November last year with the arrival of Agbal at the central bank who quickly raised rates, helping boost the lira and the confidence of investors.

     But this peace was shattered in March when Erdogan fired Agbal after his third rate hike - the bank's fourth since September 2020 - and since this change of governor the lira has lost over 10 percent to trade at 8.09 to the dollar today, down 8.8 percent since the start of 2021 and down 26 percent since the start of 2020.

     Inflation, meanwhile, has continued to rise for the last five months to 16.19 percent in March, more than 3 times the central bank's medium-term target of 5.0 percent.

      CBRT left its one-week repo rate at 19.0 percent.

Turkey raises rate 4th time, will hike more if needed

      Turkey's central bank raised its policy interest rate for the fourth time since September 2020 in light of the adverse outlook for inflation and reiterated it would maintain a tight monetary policy stance "decisively" and for an extended period until there is a permanent fall in inflation.
      The Central Bank of the Republic of Turkey (CBRT) raised its one-week repurchase auction rate by another 200 basis points to 19.0 percent, more than expected by analysts but by the same amount as three of its last four rate hikes.
      Since September 2020, when the central bank changed course after 9 rate cuts from July 2019 to May 2020, the policy rate has been raised by 10.75 percentage points.

      Three of these rate hikes have taken place under the current governor, Naci Agbal, who was installed by Turkey's strong-willed president Tayyip Erdogan.

     Turkey becomes the second major emerging market central bank after Brazil to raise rates this week to curb rising inflation as economies recover after the COVID-19 pandemic and the 11th central bank worldwide to raise rates this year.

     "Considering the upside risk to inflation expectations, pricing behavior and the medium-term inflation outlook associated with these developments, the MPC (monetary policy committee) has decided to implement a front-loaded and strong additional monetary tightening," CBRT said, adding it would tighten its monetary policy stance further if necessary.

     Turkey's inflation rate has risen in the last four months and rose to 15.61 percent in February from 11.89 percent in October, more than 3 times the central bank's inflation target of 5.0 percent.

     Despite the monetary tightening, the dampening impact on demand and thus inflation and inflation expectations is delayed by the recent rise in the growth of credit, higher international food and commodity prices, supply constraints and the higher cost of imports from the fall in the lira's exchange rate since March last year.

     In 2020 Turkey's lira lost 20 percent but rose 1 percent today after the rate hike to 7.37 against the U.S. dollar and is now marginally higher than at the start of this year.

     "Economic activity is on a strong course," the central bank said, adding economic activity was expected to pick up in the services sectors as pandemic-related restrictions are eased.

    Last year Turkey's economy was one of the few to grow, expanding 1.8 percent, up from 0.9 percent in 2019, due to a boost in lending by state banks, and is expected to grow around 5 percent this year.

Turkey tightens policy again by raising lira reserve ratio

     Turkey's central bank, which has already raised its key interest rates three times in the last six months, tightened its policy further by raising its reserve requirements for banks, saying the move aimed to improve the effectiveness of its transmission of monetary policy.

     The Central Bank of the Republic of Turkey (CBRT) raised the reserve requirement ratio for all Turkish lira deposits by 200 basis points and lowered the upper limit for how much foreign exchange banks can hold to 20 percent from 30 percent and the upper limit for gold to 15 percent from 20 percent.

     In addition, CRBT will raise its renumeration rate applied to bank's required reserves by 150 basis points to 13.50 percent.

     The changes are expected to increase lira-denominated reserves at the central bank by around 25 billion lira, while total required reserves in foreign exchange and gold are expected to decline by US$500 million if the reserve option utilization rate remains unchanged for remaining tranches, the bank said.

     Unlike most central banks, Turkey's central bank frequently uses reserve requirements as part of its box of monetary policy tools.

     The previous change came in November when CBRT not only raised its main interest rate but revised its reserve requirement regulation by scrapping a policy of linking the reserve requirement and renumeration with banks' loans so the same ratio was applied to all banks.

     According to its website, the ratio on lira demand deposits is now 8 percent, 6 percent on deposits of up to 6 months, 4 percent on deposits up to 1 year and 3 percent on 1 year or longer.

     The reserve ratio on foreign currency deposits ranges from 19 percent on demand deposits to 13 percent on deposits 1 year and longer, and for precious metals the ratio ranges from 22 percent for deposits on demand to 18 percent for deposits 1 year or longer.

     Turkey's central bank raised its policy interest rate by a total of 825 basis points from September through December to 17.0 percent and has pledged to maintain a tight monetary policy stance, and tighten further if needed, until inflation falls permanently.

     At the bank's last meeting on monetary policy on Feb. 18, the bank confirmed its commitment to tight monetary policy, saying the lagged effects of a fall in the lira's exchange rate and high inflation expectations were still having an adverse impact on prices.

     However, the central bank also noted that credit growth was starting to slow amid tighter financial conditions and the decelerating impact of the monetary tightening on credit and domestic demand was expected to become more significant.

     Earlier this month the central bank's governor, Naci Agbal, told Reuters that interest rates were unlikely to be cut for a long time this year given the pressures on inflation and he also wanted to rebuild the bank's depleted foreign exchange reserves.

     Despite a rebound in the lira's exchange rate in the last four months, Turkey's inflation rate shot up to 15 percent in January from 14.6 percent in December - three times the central bank's medium-term target of 5.0 percent inflation - due to higher prices of housing, fuels and food.

     In its latest inflation report from January, CBRT forecast inflation of 9.4 percent by the end of 2021 and then 7.0 percent by the end of 2022 before stabilizing around the 5 percent target in 2023.

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     The combination of rate hikes and new economic leadership, including the arrival of Agbal in November last year has bolstered the confidence of investors.

     Last year the lira lost 30 percent of its value from the start of the year until early November when Turkey's strong-willed president, Tayyip Erdogan, installed Agbal at the central bank, followed by the resignation of Berat Albayrak, Erdogan's son-in-law, as finance minister.

     Since Nov. 8, when the lira hit a record low around 8.52 to the U.S. dollar, the lira has soared almost 19 percent - making it the world's top performer - to a rate of 7.17 today and is up 2.4 percent this year.

     After shrinking in the second quarter, Turkey's economy bounced back in the third quarter and grew an annual 6.7 percent from a fall of 9.9 percent. 

      Analysts estimate economic growth of up to 8.0 percent in the fourth quarter of 2020 for an annual expansion of 2.5 percent.

Turkey raises rate 3rd time to eliminate risks to inflation

       Turkey's central bank raised its policy interest rate for the third time this year, and for the second time under its new governor, in what it said was a "strong monetary tightening" to eliminate the risks to the outlook for inflation and reiterated it would "decisively" maintain tight monetary policy until there is a permanent fall in inflation.
      The Central Bank of the Republic of Turkey (CBRT) raised its one-week repo auction rate by another 200 basis points to 17 percent and has now raised it by 825 points following a first hike in September and then a second hike in November after the new governor, Naci Agbal, was installed by Turkey's strong-willed president, Tayyip Erdogan.

     "Domestic demand conditions, cumulative cost effects, in particular the exchange rat effects, increasing international food and other commodity prices and deterioration in inflation expectations continue to affect the pricing behavior and inflation outlook adversely," CBRT's monetary policy committee (MPC) said, adding:

     "Accordingly, the MPC, taking into account the end-2021 forecast target, has decided to implement a strong monetary tightening, in order to eliminate risks to the inflation outlook, contain inflation expectations and restore the disinflation process as soon as possible."

     Agbal, the central bank's fourth governor in five years, took over from Murat Uysal who was fired by Erdogan on Nov. 6. Two days later,  on Nov. 8, Berat Albayrak, Erdogan's son-in-law, resigned as finance minister, in another manifestation of the change in Turkey's economic leadership.
      While CBRT was widely expected to continue tightening its monetary policy following last week's briefing by its governor,  the hike was stronger than most economists had forecast. The average of polls had settled on a 150 basis point hike, within a range of 75 to 200 points.
      The three rate hikes have more than erased the central bank's five rate cuts from January to May, with the one-week repo rate now 5 percentage points above its level at the start of the year and the highest since  September 2019 when the central bank was in the midst of an easing campaign that began in July and continued through the COVID-19 crises at the start of the year until May when it stabilized for a few months at 8.25 percent before the shift in policy in September.

      Despite the three rate hikes, Turkey's inflation rate has continued to accelerate and it jumped to 14.03 percent in November from 11.89 percent in October, almost three times the central bank's medium-term target of 5.0 percent.

      But the rate hike was welcomed by the foreign exchange market with the lira continuing its recent rise from a record low around 8.52 to the U.S. dollar on Nov. 8 when Erdogan's son-in-law resigned. 

      Since then the lira has appreciated xx percent against the dollar to trade at 7.57 today 7.57  7.65

      However, the lira is still down 21.4 percent since the start of the year, one of the biggest losers among emerging market currencies this year along with Argentina's peso, explaining some of the upward pressure on inflation from the rise in import prices.

      The continued rise in the lira indicates that financial markets are still voicing confidence in the change in the direction of Turkey's economic policy following the change in finance minister and governor in November toward a more orthodox policy.

      In addition to the change in governor and finance minister, Erdogan on Nov. 11 pledged a new economic strategy based on stability, lower inflation and international investment. 

      Erdogan's pledge came two days after the bank's new governor, Agbal, in his first public comments on Nov. 9 underscored his commitment to price stability.

      On Dec. 16 Agal confirmed his determination to achieve disinflation, saying he would tighten policy to achieve this and a tight and decisive monetary policy would be maintained in 2021 to reach an interim target of 9.4 percent inflation by the end of 2021 and then 5.0 percent in 2023.

      Agbal also confirmed that CBRT would be following a more normal monetary policy, with the one-week repo rate its main policy tool to signal its stance while the rate corridor and late liquidity window only used for temporary liquidity issues, unlike its move under the previous governor when markets were left confused as the bank on occasions used a range of tools to adjust lending rates.

      Agbal's commitment to stamp out inflation and rebuild foreign exchange reserves - which have declined to a 15-year low - should also help in reducing the level of dollarization in Turkey where many citizens used U.S. dollars to protect their savings.

      In recent years the central bank's policy has zig-zagged with investors questioning its commitment to low inflation - putting downward pressure on the lira - and its independence from political pressure as Erdogan for years has openly called for low interest rates to boost economic growth, arguing high interest rates cause high inflation, an view that is not shared by financial markets or economists.

      In today's statement, the central bank confirmed that a tight monetary policy will be "decisively sustained until strong indicators point to a permanent fall in inflation in line with the targets and to price stability." 

      Turkey's economy has bounced back fast from the hit to activity in the second quarter, with gross domestic product rising 15.6 percent year-on-year in the third quarter after declining 10.8 percent in the second quarter.

      CBRT said a partial recovery of the global economy is continuing in the fourth quarter though uncertainty prevails due to the recent rise in COVID-19 infections just as the vaccine is showing positive developments.

      Nationally, data for the fourth quarter point to a "strong course" in economic activity but new restrictions due to the rising number of virus cases create uncertainty about the outlook in the short run, especially for the services sector.

Turkey hikes rate, to keep tight stance till inflation falls

     Turkey's central bank, now with its fourth governor in five years, raised its policy rate for the second time in three months in what it described as a "transparent and strong monetary tightening" and pledged a tight policy stance "will be decisively sustained until a permanent fall in inflation is achieved."

     The Central Bank of the Republic of Turkey (CBRT) raised its one-week repurchase auction rate by a sharp 475 basis points to 15.0 percent - in line with expectations  - and has now raised the rate by 675 points following the 200 point rate hike in September. 
     The two rate hikes more than erase the five rate cuts from January to May so the one-week repo rate has now been raised by a net 300 basis points this year.  
     CBRT began cutting its rate in July 2019 from 24.0 percent so the net reduction in the key interest rate in 16 months still amounts to 9 percentage points.

     In a sign the rate hike and pledge to maintain high rates illustrates a long-awaited change in  authorities' approach to monetary policy, the Turkish lira continued its recent rise after plunging 30 percent to new record lows on fears of political interference in monetary policy and rising inflation.

      The lira traded at 7.55 to the U.S. dollar today and is up almost 13 percent since a record low on Nov. 8, a few days after Turkey's president, Tayyip Erdogan, on Nov. 6 fired Murat Uysal as central bank governor and replaced him with ex-finance minister Naci Agbal.

      However, the lira still remains 21 percent below its level at the start of this year.

      On Nov. 8 the shift in the leadership of Turkey's economic policy took another twist as Finance Minister Berat Albayrak, Erdogan's son-in-law, resigned after taking over in mid-2018.

      On Nov. 9 the bank's new governor, Agbal, issued a statement that underscored his commitment to price stability. This immediately comforted investors who boosted the lira and Turkish bonds as they took the statement as a sign the central bank was now ready to get serious about tackling inflation.

      The new confidence in Turkey's economic leadership was further boosted on Nov. 11 when Erdogan pledged a new economic strategy based on stability, lower inflation and international investment, a sharp change in rhetoric by the country's president who on countless occasions has called for lower interest rates, arguing high interest rates cause high inflation.

      Turkey's inflation rate has remained around 12 percent this year - it rose to 11.89 percent in October from 11.75 percent in September - and CBRT said the lagged effects of lira depreciation, rising international food prices and deteriorating inflation expectations were having an adverse impact on the outlook for inflation, which is expected to rise further in November.

       "Accordingly , the Committee has decided to implement a transparent and strong monetary tightening in order to eliminate risks to the inflation outlook contain inflation expectations and restore the disinflation process," the bank said, adding the tight policy would be sustained until there is a permanent decline in inflation.

      In another sign of the changed in tone by the central bank, it said it would now provide all funding to banks through its main policy rate, the one-week repo auction, which it said will be the only indicator of its monetary stance.

      In recent months the central bank had resorted to various back-door measures to tighten its policy, such as raising the late liquidity rate, confusing financial markets about its commitment to fighting inflation.

     "The central bank will attain its main objective of achieving and maintaining price stability by adopting transparency, predictability and accountability principles of the inflation targeting regime," CBRT said.

Turkey holds key rate but widens rate corridor, lira hit

     Turkey's central bank once again surprised financial markets by keeping its main interest rate steady but continued its recent policy of tightening monetary conditions through a variety of other tools by raising the upper bound of its interest rate corridor.

     The Central Bank of the Republic of Turkey (CBRT) kept its one-week repo rate steady at 10.25 percent but widened the margin between the late liquidity window lending rate and overnight lending to 300 basis points by raising the late liquidity rate by 150 points to 14.75 percent.

      Today's decision by the bank's monetary policy committee follows last month's surprise 200 basis point hike in the one-week repo rate, the first outright rate hike in two years, and a series of back-door measures to tighten policy in response to accelerating inflation and a steady drop in the lira.

     "As a result of fast economic recovery with strong credit momentum, and financial market developments, inflation followed a higher-than-envisaged path," CBRT said, adding financial conditions had tightened following its earlier steps to contain inflation expectations and risks to the outlook.

     "Accordingly, the Committee has decided to keep the policy rate unchanged, while enhancing flexibility in liquidity management and continuing with liquidity measures until inflation outlook displays a significant improvement," the bank added.

     After falling steadily since early August, Turkey's lira rose at the start of this week, likely in anticipation of another rate hike. But in response to today's decision, the lira nose-dived 2 percent to a new record low of 7.96 to the U.S. dollar and is now down 25.3 percent this year.

     Turkey's inflation rate has been steady the last three months at 11.75 percent in September, 11.77 percent in August and 11.76 percent in July, only slightly below a 2020-high of 12.62 percent in June.

     According to Reuters, 17 economists polled had expected CBRT to raise its rate between 100 and 300 basis points to ensure a positive real interest rate.

      Although CBRT said "the recovery in economic activity continues," it also noted the expected moderation in imports had begun due to a phasing out of policies to support the economy from the impact of COVID-19 while exports were recovering - helped by the level of the exchange rate and relatively low commodity prices - helping support the current account.

      Turkey's gross domestic product shrank by a quarterly 11 percent in the second quarter after the first quarter fell 0.1 percent. On a year-on-year basis, GDP contracted 9.9 percent in the second quarter after it rose 4.4 percent in the first quarter.

      "While global economic activity has shown signs of partial recovery in the third quarter following the normalization steps taken by several countries, uncertainties on global economic recovery persist," the central bank said, adding advanced and emerging economies are continuing to maintain expansive monetary and fiscal policies.

Turkey raises rate 1st time in 2 years to contain inflation

      Turkey's central bank raised its key interest rate for the first time in two years, saying inflation has been tracking higher than expected due to the country's fast economic recovery and it "assessed that the tightening steps taken since August should be reinforced in order to contain inflation expectations and risks to the inflation outlook."
      The Central Bank of the Republic of Turkey (CBRT) raised its one-week repo rate by 200 basis points to 10.25 percent, unwinding some of the 375 points of rate cuts earlier in the year. This leaves the one-week repo rate 175 basis points below its level at the start of the year.

      The last time CBRT raised its rate was in September 2018 when it was raised to 24.0 percent as part of three rapid rate hikes in 5 months to contain inflation in response to a fall in the lira and capital outflows.

      But since July 2019, when the current governor, Murat Uysal, was installed, the central bank had been on an easing cycle and cut rates 9 times in a row and by a total of 15.75 percentage points, with the latest cut in May.

      CBRT is the 8th central bank to raise rates this year but 3 of those hikes (Tajikistan, Czech Republic and Kazakhstan) took place before global monetary policy took a sharp U-turn in the face of the economic damage from the COVID-19 pandemic. These three hikes were later reversed by rate cuts.

       It is the first central bank among the Group of Twenty (G20) major economies that represent some 85 percent of the global economy to have raised its rates since the outbreak of the COVID-19 pandemic earlier this year and the first emerging market central bank since March to raise its rates in response to inflationary pressures.

      CBRT said maintaining a sustained process of disinflation was key to lower long-term interest rates, a stronger economic recovery and lower sovereign risk and this requires a continuation of a "cautious monetary stance" that takes into account the underlying trend of inflation.

     "Accordingly, the Committee decided to increase the policy rate by 200 basis points to restore the disinflation process and support price stability," CBRT said.

      Although Turkey's headline inflation rate was stable at 11.77 percent in August from 11.76 percent in July, the lira has been weakening steadily for the last decade - putting upward pressure on import prices and thus inflation - and has plunged 23 percent since Aug. 1 on negative real interest rates, concern over the central bank's low foreign exchange reserves and tensions with the European Union over the east Mediterranean.

      Instead of outright rate hikes to its benchmark interest rate, CBRT has resorted to other tightening measures, including directing lenders to borrow at higher rates and in August raised reserve ratios to drain liquidity from the market and boost reserves.

      In response to the rate hike, the lira jumped 1.3 percent to 7.59 to the U.S. dollar but remains down almost 22 percent since the start of this year.

      CRBT said the rise in inflation from pandemic-related supply-side factors was expected to gradually phase out as weak demand curbs price rises.

     "Yet, as a result of fast economic recovery with strong credit momentum, and financial market developments, inflation followed a higher-than-envisaged path," CRBR said.

      Turkey's economy shrank an annual 9.9 percent in the second quarter of this year, and by a quarterly 11 percent, but CBRT said economic activity was recovering markedly in the third quarter as commercial loans have begun to normalize and tourism has begun to improve.

     "The recovery in exports of goods, relatively low levels of commodity prices and the level of the real exchange rate will support the current account balance in the upcoming periods," CBRT added.

Turkey holds rate for 3rd time, withdraws more liquidity

     Turkey's central bank left its key interest rate steady for the third time, confirming its view the economic recovery is gaining pace and as part of a normalization of policy it would again raise reserve requirements so all the liquidity that was injected in March is now withdrawn.

     The Central Bank of the Republic of Turkey (CBRT) kept its policy rate, the one-week repo rate, at 8.25 percent, unchanged since May when it cut its rate after five cuts in 2020 totaling 375 basis points.

     In June the central bank then kept the rate steady, wrapping up a 9-time rate cutting spree begun in July 2019 that totaled 15.75 percentage points, and also left the rate steady in July, noting the economic recovery was gaining pace. 

      On July 18 CBRT then raised the reserve requirement on all foreign currency deposits, regardless of maturity, by 300 basis points in the first step toward rolling back some of the 500 point cut in requirements on March 17 at the height of the pandemic-induced financial shock.

      The July hike in the reserve ratio withdrew an estimated US$9.2 billion of FX and gold liquidity as part of total injection of US$14.3 billion to financial markets in March from the cut to reserve requirements and liquidity injections.

      Today CBRT said it would raise the FX reserve requirement for all maturities by another 200 basis points, completing the rollback of the March cut, and also raise the reserve requirement for precious metals deposit by 700 points.

      In addition, CBRT will raise the reserve requirement on Turkish lira deposits with maturities up to 6 months by 200 basis points and by 150 basis points for maturities of up to 3 years.

     "Thus, with the revision made on 18 July 2020 and this current arrangement, USD17.7 billion of FX and gold liquidity, which has been injected  into the market since 17 March due to the reduction of FX reserve requirement ratios and the fulfillment of real credit growth conditions by some banks for the first time, will be full withdrawn as part of the normalization," CBRT said.

      The hike in reserve requirements follows several moves by the central bank this month to tighten its policy stance without raising its key interest rate, something that would put the current governor on a collision course with Turkey's president, Recep Tayyip Erdogan, who last year fired the previous governor for not lowering rates.

     On Aug. 11 CBRT reduced to zero the cheap liquidity it provides to primary dealers as part of its open market operations, days after it suspended one-week repo auctions, forcing lenders to meet funding needs through the overnight window at 9.75 percent.

      Turkey's lira, which fell sharply to new record lows earlier this month, eased slightly in the wake of today's decision to trade at 7.34 to the U.S. dollar but remains up from the record low of 7.39 that it hit earlier this week, but still down almost 19 percent since the start of this year.

     Although global economic activity has shown signs of a partial recovery in the third quarter of this year, the central bank said uncertainty remains high and both advanced and emerging economies are maintain expansionary monetary and fiscal stances.

     While commercial loans have started to normalize, consumer loans remain strong, tourism revenues have partially improved due to an easing of travel restrictions, while a recovery of exports, low commodity prices and the exchange rate will support the current account balance, CBRT said.

     Core inflation is starting to trend higher due to a rise in pandemic-related costs and changes in the exchange rate and credit is now retaining disinflationary effects from the demand side while there are still significant uncertainties about domestic and external demand, it added in explaining its decision to keep the policy rate unchanged.

     As in recent months, the central bank said "keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance" and underlying inflation will determine the future stance.

Turkey cuts rate 9th time, signs of economy bottoming

     Turkey's central bank cut its key interest rate for the fifth time this year and for the ninth time since July last year, saying economic activity showed signs of bottoming in the first half of May after the government began to normalize the economy from measures to contain the coronavirus while inflation is in line with projections.
     The Central Bank of the Republic of Turkey (CBRT) cut its policy rate, the one-week repo rate, by another 50 basis points to 8.25 percent and has now cut it by 375 points this year following cuts in every month since the start of the year.
     Since July 2019, when Murat Uysal was installed as new governor of the central bank, rates have been cut 15.75 percentage points.
     The rate cut was in line with expectations.
     As in recent months, CBRT said maintaining a sustained process of disinflation requires a "cautious monetary stance" and this stance will be determined by considering the trend of underlying inflation.
     Turkey's inflation rate eased to 10.94 percent in April from 11.86 percent in March despite the recent depreciation of the Turkish lira, which hit new record lows two weeks ago.
     But the decline in international commodity prices, especially oil and metals, had countered some of the upward pressure on inflation from the lower lira and the disinflationary effects of lower demand was estimated to have increased, CBRT said.
     Although consumer prices might rise in the short term due to seasonal and pandemic-related effects on food prices, the disinflationary effects of lower demand will become more prevalent in the second half of the year, it added.
     "Accordingly, considering all factors affecting the inflation outlook, the Committee decided to make a measured cut in the policy rate," the central bank said, adding the outlook for inflation was in line with its projections for the end of the year.
     Last month CBRT lowered its forecast for inflation to end this year at 7.4 percent from an earlier forecast of 8.2 percent, and then to fall further to 5.4 percent by the end of 2021 before stabilizing around the 5.0 percent target in the medium term.
     Turkey's lira hit a new record low of almost 7.3 to the U.S. dollar on May 7 but has since firmed over optimism the central bank will be able to agree on a swap line with the U.S. Federal Reserve to ensure dollar funding to meet its debt service obligations.
     Today the lira was trading at 6.79 to the dollar, up 7 percent since the low on May 7 but down 12.4 percent since the start of this year and down 22 percent since the start of 2019.
      Economic activity in Turkey was following an upward trend in the first two months of the year but then began to weaken by mid-March due to the impact of the COVID-19 pandemic on trade, tourism and domestic demand.
     CBRT said high-frequency indicators showed signs of bottoming-out in the first half of May and despite the fall in tourism and exports, the current account is expected to follow what is said was a "moderate course" this year due to the restraining effects of commodity prices and imports.

Turkey cuts rate 8th time on downside inflation outlook

    Turkey's central bank cut its policy rate for the fourth time this year and for the 8th time since July 2019, saying the outlook for inflation is to the downside from weak domestic demand, inflationary expectations and producer prices stemming from the efforts to contain the spread of the coronavirus.
     The Central Bank of the Republic of Turkey (CBRT) cut its one-week deposit rate by another 100 basis points to 8.75 percent and has now cut it by 325 basis points this year and by 15.25 percentage points since July last year when it began its easing cycle after a new governor was installed.
    As other central banks worldwide, CBRT has been using a wide range of its monetary tools to ease its policy stance and has injected liquidity into financial markets to ensure they continue to function smoothly so they can supply credit to businesses and the economy.
     CBRT has also been purchasing government debt, including from the country's unemployment insurance fund, and on April 17 it doubled its limit on its asset purchases to 10 percent of its total assets from 5 percent.
     Turkey's headline inflation rate eased to 11.86 percent in March from 12.37 percent in February and while core inflation rose to 11.65 percent, CBRT said inflation expectations, demand conditions and producer prices were contributing to a "mild trend" in core inflation indicators.
      Despite a depreciation of the Turkish lira due to global developments, a continued sharp fall in commodity prices, especially crude oil and metals prices, were having a favorable effect on the outlook for inflation.
     "Keeping the disinflation process in track with the targeted path requires the continuation of a cautious monetary stance," CBRT said, adding maintaining a sustained disinflation process remains key to lowering the sovereign risk, lowering long-term interest rates and a stronger economic recovery.
      Turkey's lira, which has been falling for the last decade, has depreciated sharply this year and fell further in response to today's rate cut to trade at 6.99 to the U.S. dollar, down almost 15 percent this year.

This week in monetary policy: China, Turkey, Paraguay, Ukraine and Russia

    This week - April 19 through April 25 - central banks from 5 countries or jurisdictions are scheduled to decide on monetary policy: China, Turkey, Paraguay, Ukraine and Russia.

    Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.

    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

WEEK 17
APR 19 - APR 25, 2020:
CHINA	20-Apr	4.05%	0	-10	4.35%	EM
TURKEY	22-Apr	9.75%	-100	-225	24.00%	EM
PARAGUAY	22-Apr	3.25%	-50	-75	4.75%
UKRAINE	23-Apr	10.00%	-100	-350	17.50%	FM
RUSSIA	24-Apr	6.00%	0	-25	7.75%	EM

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Turkey cuts rate 6th time as inflation largely as forecast

     Turkey's central bank lowered its policy rate by another 50 basis points, the smallest cut in the current easing cycle, and said the path of inflation is broadly in line with its forecast and the current monetary policy stance is consistent with this path.
     The Central Bank of the Republic of Turkey's (CBRT) cut its one-week repo auction rate to 10.75 percent and it has now been cut six times and by a total of 13.25 percentage points since July 2019.
     It is CBRT's second rate cut this year, with the size of the cut smaller than the 75 basis point cut in January, a 200 point cut in December 2019, a 325 point cut in September, and a 425 point cut in July.
     Reflecting the smaller size of today's rate cut, CBRT's monetary policy committee said it was "a more measured cut" in light of the inflation outlook.
      In January CBRT described its cut as "measured."
      CBRT reiterated that keeping the process of disinflation on track requires a continued "cautious" monetary stance and this stance would be determined by the trend of underlying inflation.
       Despite a rise in inflation in the last three months, CBRT said an improvement in "macroeconomic indicators, inflation in particular, supports the fall in country risk premium and helps contain cost pressures."
       It added inflation expectations, domestic demand and producer prices had contributed to a mild trend in core inflation indicators.
      After falling to 8.55 percent in October last year, Turkey's headline inflation rate has been rising in recent months and rose to a higher-than-expected 12.15 percent in January from 11.8 percent in December.
      Core inflation, which excludes volatile items such as energy, food, some beverages, tobacco and gold, rose to 9.88 percent in January from 9.81 percent in December and 9.25 percent in November.
      CBRT has said it expects inflation to remain elevated in the first quarter of this year around 11.5 percent and then start decelerating in the second quarter and drop to single digits in the second half of the year.
      In its latest quarterly inflation report from January, CBRT maintained its forecast for inflation in 2020 of 8.2 percent, falling to 5.4 percent by the end of 2021.
     After rising from May to mid-August 2019, the Turkish lira has resumed its decade-long downtrend and weakened further to 6.075 to the U.S. dollar after the rate cut to be down 2 percent since the start of this year - partly in response to escalation of violence in Syria - and down 13 percent since the start of 2019.
     Turkey's lira has suffered several bouts of dramatic falls in value in recent years, including the fallout from an attempted coup in 2016 and then a financial crises in 2018, partly in response to President Recep Tayyip Erdogan's firmer grip on power and unusual views on interest rates.
      In 2018 the central bank responded to a 30 percent plunge in the lira in July and August by raising its rate by 16 percentage points to push down inflation, raising the ire of Erdogan who believes high interest rates lead to higher inflation.
      To ensure inflation would decelerate from a high of over 25 percent in October 2018 and protect the exchange rate of the lira, CBRT maintained its rate at 24.0 percent despite Erdogan's frequent pressure to lower them.
      By June 2019 Erdogan had run out of patience and in July he fired the governor, Murat Cetinkaya, for failing to cut rates, the first time a governor had been dismissed since a 1980 military coup.
      Ironically, Cetinkaya's dismissal came just as analysts were starting to pencil in rate cuts as inflation was finally declining. Erdogan replaced Cetinkaya with the current governor, Murat Uysal.
      Last week Erdogan told lawmakers in the parliament the trend of falling interest rates in Turkey would continue and he was hopeful inflation would be below the government's end-year target of 8.5 percent.
      After shrinking on an annual basis for three quarters, Turkey's economy expanded by 0.9 percent in the third quarter of 2019 and CBRT said "recent data indicator that recovery in economic activity continues," and the recovery should be sustained with the help of the ongoing disinflation and improved financial conditions.
      However, it also said investment and employment remain weak, and the weaker global economic outlook tempers external demand despite the favorable effects of an improved competitiveness.

Turkey cuts rate "measured" 75 bps, sees inflation easing

     Turkey's central bank lowered its policy rate by another 75 basis points to 11.25 percent and reiterated its monetary policy stance is consistent with the projected path of slowing inflation but it still needs to maintain a "cautious" policy stance to ensure inflation declines.
    It is the first rate cut by the Central Bank of the Republic of Turkey (CBRT) this year but continues the rapid pace of easing since July last year when the current governor, Murat Uysal, took over from Murat Cetinkay, who was fired for failing to follow President Recep Tayyip Erdogan's instructions to lower rates.
    Since July 2019 CBRT has cut its key rate by 12.75 percentage points but inflation has also come down sharply since topping 25 percent in October 2018 following a currency crises that sent import prices soaring.
    In 2019 Turkey's inflation rate decelerated from just over 20 percent in January to a low of 8.55 percent in October before rising in November and further in December to 11.84 percent, fueling expectations the central bank may trim the size of today's rate cut to around 50 basis points.
    CBRT has forecast inflation of 12 percent by the end of 2019 and expects it to decline further to 8.5 percent by the end of 2020, with a decision in December to scrap an automatic tax increase on alcohol and tobacco products in the first half of this year helping curb inflation further.
     "The course of inflation is considered to be broadly in line with the year-end inflation projection," CBRT said, adding the exchange rate, domestic demand and producer prices have contributed to a mild trend in core inflation.
     The central bank repeated its guidance that the monetary policy stance would be determined by considering the underlying trend in inflation to ensure it continues to decline.
     In December the International Monetary Fund (IMF) forecast inflation would remain largely stable at around 12 percent in both 2020 and 2021, adding "the recent monetary policy easing has gone too far," given the still-high inflation expectations and rapid credit growth in state-owned banks.
    Turkey's lira, which fell 33 percent in 2018 and another 11 percent in 2019, has bounced back in the last week and rose further today following the central bank's decision.
     The lira rose 0.5 percent to 5.85 per U.S. dollar today to be up 1.7 percent this year, helped by the recent rise in emerging market assets.

This week in monetary policy: Turkey, South Africa, Egypt, South Korea & Zimbabwe

    This week - January 12 through January 18 - central banks from 5 countries or jurisdictions are scheduled to decide on monetary policy: Turkey, South Africa, Egypt, South Korea and Zimbabwe.

    Following table includes the name of the country, the date of the next policy decision, the current policy rate, the result of the last policy decision, the change in the policy rate year to date, and the rate one year ago.

    The table is updated when the latest decisions are announced and can always accessed by clicking on This Week.

WEEK 3
JAN 12- JAN 18, 2020:
TURKEY	16-Jan	12.00%	0	0	24.00%	EM
SOUTH AFRICA	16-Jan	6.50%	0	0	6.75%	EM
EGYPT	16-Jan	12.25%	-100	-450	16.75%	EM
SOUTH KOREA	17-Jan	1.25%	0	0	1.75%	EM
ZIMBABWE	17-Jan	35.00%	0	0	N/A

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Turkey cuts rate 3rd time, inflation to determine future

    Turkey's central bank lowered its policy rate by a larger-than-expected 250 basis points and said the extent of future monetary tightness would be determined by the trend of underlying inflation to ensure inflation continues to decline.
     The Central Bank of the Republic of Turkey (CBRT) cut its benchmark one-week repo rate to 14.0 percent and has now cut it by a total of 1,000 basis points this year following cuts in July, September and today.
     While a moderate recovery of economic activity in Turkey is continuing, investment remains weak, weaker global growth is tempering external demand and exports are expected to contribute less to economic growth.
     The outlook for inflation is continuing to improve and inflation by the end of the year is likely to be "notably below" the forecast from the July inflation report, CBRT added.

Turkey cuts rate another 325 bps but to remain cautious

     Turkey's central bank lowered its policy rate for the second time this year but said it would maintain a cautious monetary stance to ensure inflation continues to decline, with the outlook for inflation determining the extent of future monetary tightness.
     The Central Bank of Turkey (CBRT) cut its benchmark one-week repo rate by a larger-than-expected 325 basis points to 16.50 percent and has now lowered it by a total of 750 points this year following a cut in July after Governor Murat Uysal took over from Murat Cetinkaya who was fired for failing to follow President Recep Tayyip Erdogan's instructions to lower rates.
     CBRT said the repo rate was now consistent with its projected disinflation path, which is critical for achieving lower sovereign risk, lower long-term rates and a stronger economic recovery.
     Turkey's inflation rate declined to 15.01 percent in August from 16.65 percent in July and domestic demand and the current tight monetary policy continue to support a further decline, with the central bank expecting inflation to fall faster than it projected in July.
      Turkey's economy is slowly improving but remains in contraction, with gross domestic product in the second quarter shrinking by an annual 1.5 percent following a fall of 2.4 percent in the first quarter and 2.8 percent in the fourth quarter of last year.
     "Recently released data indicate that moderate recovery in economic activity continues," the central bank said, adding net exports were contributing to growth while investment remains weak and private consumption has gradually improved.

Turkey raises FX reserve requirement 3rd time in 2019

     Turkey's central bank raised the reserve requirement for banks' deposits in foreign exchange for the third time this year "to support financial stability" in a move it said will withdraw around US$2.1 billion of foreign exchange liquidity from the market.
     The Central Bank of the Republic of Turkey (CBRT) raised its reserve requirement ratio by 100 basis points for all maturities and for participation funds and has now raised the ratio by a total of 400 points this year following increases on May 9 and May 27.
     In addition, CBRT said it was lowering the remuneration rate for all US dollar-denominated required reserves, reserve options and free reserves held at the central bank by 100 basis points to 1.0 percent.
     The exchange rate of Turkey's lira firmed further today and was trading at 5.54 to the U.S. dollar, continuing its steady rise since May 10. But compared with the start of this year the lira is still down 4.7 percent and down 31.6 percent since the start of 2018.
     In August last year the lira tumbled, boosting inflation and triggering a sharp 625 point rate hike by CBRT in September. The central bank only began to unwind its tight policy stance on July 25 following the sacking of the previous central bank governor by President Recep Tayyip Erdogan.
     In his first press conference after the benchmark repo rate was cut by 425 basis points to 19.75 percent, CBRT Governor Murat Uysal on July 31 said the firing of his predecessor Murat Cetinkaya was done in line with existing legislation and the central bank was independent in its decisions on how to achieve the inflation objective, which is set together with the government.
     According to press reports, Uysal signaled further rate cuts by saying data was showing a lot of room for manoeuvre in monetary policy.
     Uysal lowered the central bank's year-end inflation forecast to 13.9 percent from a previous 14.6 percent and expects inflation to decline to 8.2 percent by the end of 2020 before reaching the target of 5.0 percent by the end of 2021.
     Turkey's inflation rate has been decelerating since October last year though it rose to 16.65 percent in July from 15.72 percent in June.

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