All eyes on Türkiye's Central Bank: Will it maintain the status quo before the elections?

Today, the Central Bank of Türkiye's Monetary Policy Committee (MPC) will announce its interest rate decision. Currently, the policy rate stands at 8.5%. The question on everyone's mind is: what will be the MPC's last decision before the upcoming elections?

On February 23rd, the Central Bank lowered the policy rate by 50 basis points to 8.5%, and then kept it stable during the March 23rd meeting. During the meeting where the rate was lowered, the MPC stated that "the measured reduction in the policy rate is considered to be sufficient to support the necessary recovery after the earthquake while preserving the price and financial stability." They signaled an end to interest rate cuts.

During the March 23rd MPC meeting, the policy rate was kept stable, and once again, it was noted that the current policy rate was "sufficient." Considering the latest verbal guidance, I believe that the policy rate will remain unchanged in today's MPC announcement.

Market expectations have also been shaped by the written guidance from the last MPC meeting. For instance, most economists who participated in AA Finance's survey expressed the opinion that the policy rate will remain stable in today's meeting. Similarly, all participants in Reuters' survey think that the rate will remain unchanged.

Meanwhile, the upward trend in the exchange rate has continued since the last meeting. On March 23rd, the USD/TRY rate was at 19.05, while today, it is trading around 19.43.

Let me briefly explain why I mentioned the exchange rate. Although the Central Bank operates under the inflation targeting regime, it has been taking steps to suppress the exchange rate due to the high pass-through effect from the exchange rate to inflation for a while now. These steps are mainly taken through macro-prudential measures, initiatives to promote the use of the Turkish lira, and reserve management.

We see that the main purpose of macro-prudential measures and initiatives to promote the use of the Turkish lira is to encourage deposit holders to keep their money in Turkish lira through banks. The proportional regulations introduced with regard to the share of Turkish lira in the total deposits of banks are aimed at directing deposit holders towards Turkish lira.

Meanwhile, we see that the Central Bank takes steps to meet the foreign exchange demand in the market through reserve management. Since we can monitor the developments on the reserve side of the bank with the release of the Weekly Monetary and Banking Statistics, it is also possible to see the steps taken by the bank regarding reserve management and transaction amounts. In this context, we can also see that the reducing effect of foreign exchange demand in the market on bank reserves has been reflected in the data for a while.

In summary, we do not expect the Central Bank to make a major policy change before the elections. We anticipate that the Bank will continue its path by keeping its policy interest rate stable and implementing macro-prudential measures, initiatives to promote the use of the Turkish lira, and reserve management for a while longer.