Central Bank keeps policy rate constant

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The Central Bank has decided to keep the policy rate (one-week repo auction rate) constant at 8.25 percent.

Pointing to coronavirus developments which substantially weakened global growth in the second quarter, a statement by the bank's Monetary Policy Committee stated that despite a partial recovery in global economic activity in the third quarter thanks to normalization steps, uncertainty in the global economic recovery remains high.

"Although tourism revenues declined due to the pandemic, easing travel restrictions are expected to contribute to a partial improvement," it noted.

The bank also said the recovery in exports of goods and low commodity prices will support the current account balance in the coming periods.

It reiterated that demand-driven disinflationary effects will become more prevalent in the second half of the year, but risks on the end-year projection are considered to be on the upside due to recent developments in inflation.

The bank made it clear that maintaining a sustained disinflation process is a key factor for achieving lower sovereign risk, lower long-term interest rates, and stronger economic recovery.

Measures for economic recovery

"Economic recovery, which started in May following gradual steps towards normalization, is gaining pace," the Central Bank noted.

"Recent monetary and fiscal measures that aim to contain negative effects of the pandemic on the Turkish economy contribute to financial stability and economic recovery by supporting the potential output of the economy.

"Although tourism revenues declined due to the pandemic, easing travel restrictions are expected to contribute to a partial improvement. The recovery in exports of goods and low levels of commodity prices will support the current account balance in the upcoming periods."

"Food inflation has risen due to the pandemic"

"Despite the restraining effects of aggregate demand conditions, pandemic-related rise in unit costs have led to an increase in the trends of core inflation indicators," the statement said.

"International commodity prices have continued to restrain consumer inflation, while food inflation has risen due to seasonal and pandemic-related effects. As the normalization process continues, supply-side factors, which have prevailed recently due to pandemic-related restrictions, will phase out.

"Indeed, leading indicators show that monthly price increases have started to slow down in services groups that have been subject to capacity constraints during the normalization process. The Committee maintains the view that demand-driven disinflationary effects will become more prevalent in the second half of the year, but risks on the end-year projection are considered to be on the upside due to recent realizations in inflation.

The decrease in policy rates

In June, the bank kept its one-week repo rate at 8.25 percent, following a gradual cut of 375 basis points from 12 percent in the preceding months.

Last year, in eight MPC meetings, the bank cut the rate by a total of 1,200 basis points, from 24 percent.

After eight of the meetings last year, this year the bank boosted the number of MPC meetings to 12. (HA/VK)