The Central Bank of the Republic of Turkey (CBRT) announced its fifth interest rate decision this year. As expected, the central bank kept the policy rate unchanged at 50%.
According to the CBRT announcement, the main trend of monthly inflation recorded limited weakening in April. Recent indicators point to a slowdown in domestic demand compared to the first quarter.
Additional cautionary message regarding excessive liquidity
The main topic of discussion at the Monetary Policy Committee was expected to be the liquidity of the Turkish lira. Deposit interest rates have fallen due to excess liquidity in the market. Economists said the CBRT may take steps regarding liquidity.
The CBRT statement said that excess liquidity generated by domestic and foreign resident demand for Turkish lira financial assets will be sterilized through additional measures.
“The inflationist pressure is alive and well.”
The CBRT statement uses the following description:
“The main trend in monthly inflation recorded limited weakening in April. Recent indicators point to a slowdown in domestic demand compared to the first quarter. However, imports of consumer goods increased in April, limiting the improvement in the current account. Developments and rigidities in services inflation, inflation expectations, geopolitical risks, and food prices mean the Governing Council is closely monitoring whether inflation expectations and price developments are in line with expectations.”
“Disinflation will take hold in the second half.”
The impact of monetary tightening on lending and domestic demand is being closely monitored. The Governing Council decided to keep the policy rate unchanged taking into account the delayed effects of monetary tightening, but reiterated its cautious stance on upside risks to inflation. The tightening stance of monetary policy will be maintained until the underlying trend in monthly inflation declines significantly and persistently and inflation expectations converge to the projected forecast range. If a significant and persistent deterioration in inflation is projected, the monetary policy stance will be tightened. Resolute stance in monetary policy. The underlying trend in monthly inflation will decline through balanced domestic demand, real appreciation of the Turkish lira and improving inflation expectations, and disinflation will be established in the second half of the year.
“Additional steps will be taken”
Within the scope of the objectives of simplifying the macroprudential framework and enhancing the functioning of market mechanisms, the practice of establishing securities has been abolished. Given the recent trends in credit growth and deposits, additional measures will be taken to maintain macro-financial stability and support the monetary transmission mechanism. Excess liquidity generated by domestic and foreign residents’ demand for financial assets in Turkish lira will be sterilized by additional measures.
“All vehicles will be used.”
The Governing Council will decide on policy measures aimed at containing the main trends in inflation and providing monetary and financial conditions conducive to moving inflation closer to the 5 percent objective over the medium term, taking into account the delayed effects of monetary tightening.
Indicators relating to inflation and its main trends will be closely monitored, and the Executive Board will resolutely use all tools at its disposal, in line with its main objective of price stability. “Boards make decisions within a predictable, data-driven and transparent framework.”
