Turkey Post-MPC: On The Horns of a Dilemma

Turkish MPC remained on hold once again yesterday as one-week repo rate, or so-called policy rate stood at 7.5%, along with overnight lending and borrowing rates at 10.75% and 7.25%. The central bank for sure will maintain the status quo until the end of Basci’s term in April.

Tight monetary policy stance will be maintained” part of the guidance was also once again preserved. CBT lifted its average cost of funding recently which has been slightly above 9% since late January to that end. However, with double-digit core inflation rates, it is still hard to admit that CBT is on its way to achieve its long-term inflation guidance.

On the latest survey of expectations report we saw forward inflation expectations still way above the targeted inflation rate of 5%. CBT has already guided for achieving the target in 2018 earliest.

Turkey - Forward Inflation Expectations

Interestingly, while maintaining a “tight” monetary policy stance, M2 money stock has been consistently growing, in other words, CBT has appeared to be pursuing a quantitative easing.

Turkey - M2 Money Stock

Anyone should be dwelling upon consequences henceforth.