Turkey: Central Bank tightens its policy stance in March’s emergency meeting
Political shock causes turmoil in financial markets: The Central Bank of the Republic of Turkey (TCMB) held an emergency meeting on 20 March in response to heightened market volatility. On 19 March, police detained Ekrem Imamoglu, mayor of Istanbul and the main opposition leader. The day after, a sell-off of Turkish assets, mostly by foreign investors, brought the credit default swap (CDS) premium to 296 basis points, up by 38 basis points from the Bank’s last meeting on 6 March. Moreover, it triggered an around 10% depreciation of the lira and a 7% drop in the country’s stock market benchmark, the BIST 100 index.
Central Bank tightens stance: The Central Bank decided to maintain the 1-week repo rate—the key rate that it normally uses to steer its monetary policy— at 42.50%. Instead, it raised the overnight lending rate to 46.00% from 44.00%. As a result, borrowing costs effectively rose from 42.50% to 46.00%. Meanwhile, the TCMB launched a variety of FX liquidity measures to cap market and currency volatility, spending around USD 25 billion supporting the lira.
Panelists now expect fewer rate cuts: Some of our panelists now expect fewer cuts in the policy rate this year in light of recent lira weakness and the Bank’s swift reaction. Still, interest rates are expected to fall from current levels by end-2025 as inflationary pressures in the country abate. The next regular meeting is scheduled for 17 April.
Panelist insight: Clemens Grafe and Basak Edizgil, economists at Goldman Sachs, commented:
“With ongoing protests and the upcoming holiday season likely leading to renewed FX demand, we think the TCMB will, at the next policy meeting on 17 April or before, raise the repo rate. Investors’ concerns that this could undermine the support from President Erdogan for the TCMB team (as was the case in the past) should have been put to rest by the President’s vocal backing of the program and the current team in recent days. Going forward we think the TCMB will re-enter its cutting cycle from late Q2 assuming that market volatility subsides. Our year-end policy rate forecast is now 450bps higher than before (33% versus 28.50% previously) for 2025 and thus allows for a sizeable additional risk premium.”
Meanwhile, analysts at the EIU said:
“The lira could remain under pressure even if the opposition campaign loses some of its momentum and we will revise our forecast accordingly. We will also revise our monetary policy forecast as we now expect the central bank to keep policy tight, and may raise the policy rate further. There remains a risk that the president, Recep Tayyip Erdogan, will order less orthodox monetary policies or extra spending to stimulate the economy in the hope of bolstering support among the population. Our concerns about the exchange rate, inflation and economic activity have increased and we will be reviewing our forecasts accordingly.”