Central Bank of Turkey removes $55 billion from market before announcing interest rate decision
The Central Bank of the Republic of Turkey (CBRT) has made a significant move by withdrawing ₺2.26 trillion ($55 billion) from the financial system, marking a shift from its previous stance of injecting liquidity that had been in place since March. This decision comes ahead of a crucial meeting where markets anticipate a reduction in the policy rate after a prolonged period of monetary tightening.
The primary motivation behind this move appears to be to contain inflationary expectations and support the Turkish lira. By tightening monetary conditions in the short term, the CBRT aims to manage the transition smoothly and avoid a sudden loss of confidence in the lira, even as it prepares to lower rates.
Inflation remains a significant challenge in Turkey. Although the annual inflation rate for June was slightly better than expected at 35.05%, persistent price rigidity, particularly in core consumer expenditure groups, continues to weigh on disinflation efforts. Withdrawing liquidity could help tamp down immediate inflationary pressures by reducing the amount of money circulating in the economy.
However, the broader market expects the CBRT to begin cutting rates soon, with projections of a 250 basis point reduction and an extended easing cycle anticipated through the next year. If the central bank follows through with rate cuts while inflation remains elevated, there is a risk that inflationary pressures could reaccelerate, especially if the lira weakens in response to easier policy.
The Turkish lira has been under pressure for years due to a combination of high inflation, political uncertainty, and periodic bouts of monetary policy unpredictability. By withdrawing liquidity ahead of a potential rate cut, the CBRT is likely trying to prevent a sudden depreciation of the lira that could be triggered by a shift to easier policy.
If the central bank manages the transition to lower rates without sparking a currency crisis, the lira may stabilize, at least temporarily. However, if inflation does not fall as hoped or if global risk sentiment sours, the lira could face renewed selling pressure—especially if foreign investors perceive a return to unorthodox monetary policies.
The return to net liquidity withdrawal suggests that the Turkish central bank is managing excess reserves cautiously. Persistent price rigidity in core consumer expenditure groups continues to weigh on disinflation, making it a long-term inflation challenge. The CBRT's move is aimed at containing inflationary expectations and supporting the Turkish lira.
The upcoming decision marks a critical juncture for Turkey's monetary policy, with markets closely watching how the CBRT balances disinflation narrative against calls for looser financial conditions. The overnight lending rate was raised to 49%.
| Action | Motivation | Inflation Risk | Lira Risk | |---|---|---|---| | Withdrawing liquidity | Signal control, prepare for rate cuts | May curb short-term inflation | May stabilize lira temporarily | | Expected rate cuts | Stimulate growth, ease credit | Risk of reaccelerating inflation | Risk of depreciation if mistimed | | Persistent core inflation | Structural, hard to address via policy | Long-term inflation challenge | Weighs on lira confidence |
- The Central Bank of the Republic of Turkey (CBRT) withdrew ₺2.26 trillion ($55 billion) from the financial system to signal a shift towards controlling inflation and supporting the Turkish lira.
- Inflation remains a significant problem in Turkey, especially in core consumer expenditure groups, which could curb disinflation efforts and weigh on the confidence of the Turkish lira.
- By withdrawing liquidity, the CBRT is attempting to manage the transition smoothly, preventing a sudden loss of confidence in the lira, even as it prepares to potentially lower interest rates.
- If markets anticipate a reduction in the policy rate after a prolonged period of monetary tightening, there is a risk that the Turkish lira could face renewed selling pressure, especially if foreign investors perceive a return to unorthodox monetary policies.
