As widely expected, Turkish central bank (CBRT) kept its policy rate unchanged at 14%. The decision comes amidst the consumer price inflation has surged to 48,7% and is expected slide towards 55-58% by the end of February.
The government takes pride in turning the monetary policy rate (the weekly repo rate) ineffective as it gives priority to “liraization” of the Turkish economy. Yet, it remains to be seen how the negative real rates at 25% and heading further down through rising inflation and expected further rate cuts in the months ahead will aid in keeping the Turkish lira stable.
In its policy rate decision note, the bank refers to posting a current account surplus this year in maintaining price stability. No need to say Turkey is unlikely to post current account surpluses in a sustainable manner given its dependency on energy imports and on intermediary goods for production.
The government and the central bank seem to be betting on keeping the TL stable throughout the year on hopes of a stronger tourism income to defy pressures from the Fed’s monetary policy tightening around the corner. Yet, ongoing geopolitical risks, the Fed effect, and the high pass through from producers’ prices that almost hit 100% will all be factors that will be challenging the central bank’s so called “disinflation” efforts. The truth is that Turkey has no monetary policy to fight its high and rising inflation and that the monetary policy scheme aims to serve the government at the upcoming critical elections. Thus, TL is vulnerable more than ever.
Hence even in the absence of a new rout of TL weakness, Turkish CPI inflation is unlikely to be anywhere close to the official estimation of 23% by the end of 2022, let alone at 8% by the end of 2023.
Below is the central bank note following the rate decision for those interested:
The variants and increasing geopolitical risks keep the downside risks to global economic activity alive and increases the uncertainty. Recovery in global demand, high course of commodity prices, supply constraints in some sectors, particularly in energy, and high transportation costs have led to producer and consumer price increases internationally. The effects of high global inflation on inflation expectations and international financial markets are closely monitored. Moreover, central banks in advanced economies assess that the rise in inflation may last longer than previously anticipated due to rising energy prices and imbalances between supply and demand. Accordingly, while monetary policy communication of central banks in advanced economies varies with their diverse outlook for economic activity, labor market and inflation expectations, they continue their supportive monetary stances and asset purchase programs.
Level of capacity utilization and other leading indicators show that domestic economic activity remains strong, with the help of robust external demand. While share of sustainable components of economic growth increases, current account balance is expected to post a surplus in 2022. Strengthening of the improving trend in current account balance is important for price stability. The Committee assesses that extending long-term Turkish lira investment credit will play a significant role in achieving this target.
Increase in inflation in the recent period has been driven by pricing formations that are not supported by economic fundamentals, supply side factors such as the rise in global energy, food and agricultural commodity prices, supply constraints, and demand developments. The Committee expects disinflation process to start on the back of measures taken and decisively pursued for sustainable price and financial stability along with the decline in inflation owing to the base effect. Accordingly, the Committee has decided to keep the policy rate unchanged. While cumulative impact of the recent policy decisions is being monitored, to create a foundation for sustainable price stability, the comprehensive review of the policy framework is being conducted with the aim of encouraging permanent liraization in all policy tools of the CBRT.
The CBRT will continue to use all available instruments decisively within the framework of liraization strategy until strong indicators point to a permanent fall in inflation and the medium-term 5 percent target is achieved in pursuit of the primary objective of price stability. Stability in the general price level will foster macroeconomic stability and financial stability through the fall in country risk premium, continuation of the reversal in currency substitution and the upward trend in foreign exchange reserves, and durable decline in financing costs. This would create a viable foundation for investment, production and employment to continue growing in a healthy and sustainable way.