Turkey's central bank cut its benchmark, short-term interest rates by 50 basis points, as expected, but also raised its reserve requirements for foreign currency deposits by the same amount in a move designed to stimulate the economy yet deter capital inflows than could threaten financial stability.
The Central Bank of the Republic of Turkey (CBRT) cut its benchmark, one-week repo rate to 4.5 percent from 5.0 percent and shifted its interest corridor further down by cutting the overnight borrowing rate, the ceiling in the corridor, for the first time this year to 3.5 percent and the lending rate, the corridor's floor, to 6.5 percent from 7 percent.
"Capital inflows remain strong and credit growth hovers above the reference rate," the central bank's monetary policy committee said in a statement, adding:
"The Committee indicated that, in order to balance the risks on financial stability, the proper policy would be to keep interest rates low while increasing foreign currency reserves via macroprudential measures."
Other short-term rates that were cut by the CBRT include the rate on borrowing by primary dealers via repo transactions, which was reduced to 6.0 percent from 6.5 percent and the lending rate on the late liquidity window was cut to 9.5 percent from 10 percent while the borrowing rate remained at zero.
The rate on reserve requirements for foreign currency deposits up to one year was raised 50 basis points to 13 percent, the requirement for one-year deposit was held at 9.0 percent while deposits of up to an including three years was raised to 11 percent from 10.5 percent.
Turkey's central bank has a history of using an array of policy instruments to tackle the challenge of boosting its domestic economy, which has been slowing down in tandem with the global economy, yet trying to avoid attracting foreign capital that can lead to a bubble in the price of assets and put upward pressure on its lira currency that makes Turkish exports less competitive internationally.
"Domestic demand follows a healthy recovery while exports slow down due to weak global economic activity," the central bank said, adding that a drop in commodity prices is helping limit the impact of increasing economic activity on the current account deficit.
It is the central bank's second cut this year in its main policy rate, the one-week repo rate, bringing this year's reduction to a total of 100 basis points, following a cut by 25 basis points in 2012.
The bank has been steadily shifting downward and narrowing its interest rate corridor since September last year. Rates within the corridor can vary daily as the central bank seeks to smooth out volatile foreign exchange rate movements.
Including the latest reduction, the overnight lending rate has now been cut by 250 basis points this year and the overnight lending rate by 150 basis points.
Turkey's short-term interest rates have been on a downward trajectory since 2002 when the borrowing rate was 57 percent and the lending rate 62 percent. Last year the CBRT started cutting the overnight lending rate from 12.5 percent but held the borrowing rate steady.
The central bank said global economic uncertainty and volatile capital flows "necessitate the monetary policy to remain flexible in both directions" and it would closely monitor the impact of its moves on credit, domestic demand and inflation expectations and adjust funding amounts in either direction, as needed.
Turkey's Gross Domestic Product stagnated in
the fourth quarter of last year from the third quarter, with the annual growth
rate falling to 1.4 percent from 1.6 percent, the lowest growth rate since the
third quarter of 2009.
In 2012 economic growth slowed to 2.6 percent from 8.5 percent in 2011 but the central bank is expecting growth this year to strengthen to 4 percent or more.
"The Committee has indicated that the weak global demand and the commodity price outlook contain the upward pressures on inflation," the bank said.
Turkey's inflation rate eased to 6.13 percent in April, down
from 7.29 percent in March, continuing the declining trend from last year's
high of 10.78 percent in May.
The CBRT targets annual inflation of 5.0 percent
this year, the same as in 2012 when inflation averaged 6.2 percent.