The closer the country gets to local elections in the spring of 2024, the greater the risk that elected officials call a stop to this process. Authorities may also choose to tighten policy via alternative lending rates rather than the current key policy rate, the one-week repo rate, or by launching a flexible interest rate corridor with a large spread between the floor and ceiling as a means of pre-empting any criticism by elected officials. We expect monetary tightening to be carried out cautiously and gradually, with close monitoring to ensure financial stability. dollar, but policymakers may prefer that it adjust even further toward more competitive levels before raising rates. Since the second round of presidential elections on May 28, the Turkish lira (TRY) has already depreciated by about 20% against the U.S. We think that the new management at the Central Bank of the Republic of Turkiye (CBRT) will gradually increase the operational interbank lending rate toward official consumer price inflation, currently at 39.6% (as of May 12, 2023, according to the Turkish Statistical Institute), as a means to stabilize the exchange rate, dampen consumer credit growth, cool inflation, and curb import demand. How would Turkiye's central bank tighten monetary policy?
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