The Central Bank of the Republic of Türkiye (CBRT) on Thursday kept its one-week repo rate, also known as policy rate, unchanged in compliance with market expectations in its last meeting ahead of the presidential runoff.
The bank kept its policy rate stable at 8.5% after holding it steady in the month before as well. It last cut it by 50 basis points in February to support economic activity after massive earthquakes hit the country’s south.
The bank said despite signals for stronger economic activity, recession concerns in advanced economies related to rate hikes and geopolitical risks threaten financial stability.
"Before the disaster of the century, leading indicators have been pointing to a stronger domestic demand compared to foreign demand as well as an increase in the growth trend in the first quarter of 2023," it said, referring to the devastating earthquakes in Türkiye earlier this year.
"Recent data shows that economic activity in the earthquake zone has been recovering faster than expected, and it is becoming evident that the earthquakes will not have a permanent impact on the performance of the Turkish economy in the medium term."
The bank also reiterated the necessity of maintaining supportive financial conditions in response to the earthquakes. It emphasized the use of alternative policy tools and aligning all policy measures with the objectives of "liraisation."
The lira stood unchanged at 19.9235 against the dollar after the central bank decision, a drop from 19.93, which it touched earlier on Thursday.
The central bank's policy of stabilizing the lira, meanwhile, sent its net foreign reserves into negative territory for the first time since 2002, while the bank has also sold $9 billion in gold since March to meet pre-election demand.
Türkiye's economic growth is high and tourism is better than expected, but the ongoing increase in domestic consumption demand, high level of energy prices, and the weak economic activity in main trade partners keep the risks on the current account balance alive, according to the bank.
Following the elections on May 14, the CBRT implemented stricter measures by broadening the range of security maintenance requirements. These requirements were initially focused on loan growth and included commercial loans and consumer loans. However, shortly before the election runoff, this decision was reversed. Nevertheless, regulations regarding currency conversion and reports of heightened supervision of banks' daily foreign exchange transactions are still in effect.
Incumbent President Recep Tayyip Erdoğan is currently leading the polls ahead of the election runoff scheduled for May 28.
Erdoğan fell just short of the 50% threshold needed to win the vote outright in the first round on May 14. He will face Kemal Kılıçdaroğlu, the chair of the main opposition Republican People’s Party (CHP) and joint candidate of the six-party opposition Nation Alliance.
Meanwhile, the Erdoğan-led People’s Alliance won a comfortable majority in the parliamentary election, which also took place 10 days ago.
Economists expected the bank to hold its benchmark one-week repo rate at 8.5% for the third straight month.
An easing trend last year saw the monetary authority cut its key one-week repo rate by 500 basis points to counter an economic slowdown before it held it at 9% in December and January. It justified the cuts by saying financial conditions must remain supportive to maintain growth in industrial production.
The bank further cut the benchmark policy rate by 50 basis points after the catastrophic Feb. 6 earthquakes killed more than 50,000 people and left millions homeless. It said the "measured" cut was "adequate" to support the recovery.
The bank left the key policy unchanged in March and April.
The government has pledged to stick to its low-interest rates policy, the core of its economic policies, in case of an election win.
It has favored lower borrowing costs as part of its economic program unveiled in 2021 to boost exports, production, investment and the creation of new jobs.
Erdoğan has insisted that high borrowing costs cause high inflation, rejecting economic thinking that suggests raising interest rates helps curb price increases.
The government says its program eventually aims to lower inflation by flipping the country’s chronic current account deficit to a surplus.
Annual inflation has moderated over the last six months, a trend that the government says will continue in the coming period. The consumer price index (CPI) eased to an annual 43.68% in April, almost halving from 85.51% in October, a 24-year peak.
