Turkey’s central bank keeps all key interest rates steady

The Central Bank of the Republic of Turkey (CBRT) held all key rates unchanged following the August meeting of the monetary policy committee yesterday. It left its benchmark one-week repo and overnight borrowing rates at 7.5 percent and 7.25 percent, respectively. The bank also kept the marginal funding rate steady at 10.25 percent. The bank has not changed the rates since May.

In a statement by the monetary policy committee, the bank said that the inflation outlook was the key factor in the decision.

"Processed food and energy price developments affect inflation favorably in the short run while exchange rate movements delay the improvement in the core indicators," the statement said. "Considering this delay and taking into account the uncertainty in domestic and global markets and the volatility in energy and food prices, the Committee has decided to implement a tighter liquidity policy as long as it is deemed necessary."

However, the bank's monetary policy committee has discussed a road map for movement toward policy normalization. A strategy document detailing the road map has been published with the interest rate announcement.

The bank's decision was predicted by the largest number of analysts before the decision. Analysts said lira volatility, politics and the imminent Federal Reserve (Fed) rate hike were the main drivers of the decision.

"The lira has sold off recently against the backdrop of general jitters in global financial markets as well as concerns about political uncertainty in Turkey," commented William Jackson, emerging markets economist with Capital Economics.

"Political uncertainty also must have been important, as any decision made now could be affected by actions by the caretaker government that will be in place shortly," said Attila Yeşilada, an economist with Global Source Partners in Istanbul. "And the upcoming Fed rate hike could greatly change external conditions. All of this means that a change in policy at this time would be premature."