Most read: USD/MXN Jumps on Sizzling U.S. Inflation. Will Traders Fade this Move?[2]
The Central Bank of the Republic of Turkey (CBRT) announced today its July monetary policy decision. In line with expectations, the institution headed by Sahap Kavcıoglu opted to keep the one-week repo rate unchanged at 19.00%, contravening the wishes of Turkish President Recep Tayyip Erdogan, who has repeatedly called for lower borrowing costs to stimulate the economy.
The move to leave rates steady for five straight months and avoid cutting them responds to relentless inflation, which has been stuck in double digits for more than three years. For reference, the June's CPI index clocked in at 17.5% y-o-y, its highest level since May 2019, driven by the fuel tax hike, higher commodity prices and TRY weakness.
The CBRT's statement retained a slightly hawkish language and indicated that tight monetary policy will remain resolutely in place until a significant decline in the expected inflation path is achieved, just as inflation volatility during the summer months linked to the reopening of the economy and high levels of inflation expectations continue to pose risks to price formation. This message appeared to trigger a marginal downward reaction in the USD[3]/TRY exchange rate, which moved down from 8.6320 to 8.6136 after the announcement crossed the wires.
Despite the current narrative, the central bank may start cutting the cost of money in the coming months when CPI cools to support the recovery and ease financial conditions, going in the opposite direction to other emerging market central
