Thursday, April 24, 2014

Turkey holds repo rate but trims late liquidity rate 150 bps

    Turkey's central bank maintained its benchmark one-week repo rate at 10.0 percent but cut the lending rate at its late liquidity window by 150 basis points to 13.5 percent, saying the "recent decline in uncertainties and partial improvement in the risk premium indicators have reduced the need for an additional tightening in liquidity policy."
    The Central Bank of the Republic of Turkey (CBRT), which raised its repo rate by a sharp 550 basis points on Jan. 28 in response to a sharp fall in the lira currency, said its "strong and front loaded monetary tightening" had helped contain the adverse impact on inflation expectations.
    "Inflation expectations and pricing behavior will be closely monitored and the tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook," the bank said, repeating its guidance from February when rates were held steady.
    In addition to raising the repo rate to its current level of 10.0 percent, the CBRT in January also shifted its overnight interest rate corridor upwards by raising the marginal funding rate, or the ceiling in the corridor, to 12.0 percent from 7.75 percent, and the borrowing rate, or the floor in the corridor to 8.0 percent from 3.5 percent.

    The impact of the January rate rise helped stabilize the lira currency and the central bank said loan growth was continuing to slow in response to its tight policy and there are signs of a deceleration of private domestic demand in the first quarter of 2014.
    Based on a recovery in foreign demand, the CBRT expects exports to support economic growth and disinflation and "lead to a significant improvement in the current account deficit in 2014."
    Turkey was among the emerging market countries that were most heavily hit last year when financial markets started to prepare for the shift in monetary policy by the U.S. Federal Reserve, which started to reduce its asset purchases in January.
    The Fed's injection of liquidity into global markets since the global financial crises led to large capital inflows into many emerging market countries but this flow started to reverse last year due to the prospect of stronger economic growth in advanced economies.
    Turkey's current account deficit and external debt rose in recent years but the current account deficit narrowed in January and February, hitting US$3.191 billion, down from $4.930 in January and $8.322 in December 2013.
    Turkey's inflation rate accelerated further in March to 8.39 percent in March, the fourth consecutive month of rising prices, but on April 17 the central bank's governor, Erdem Basci, said inflation was expected to peak in May but still remain well above the bank's 5.0 percent target for 2014.
    Turkey's economy slowed in 2012 and 2013 after strong growth of 8.5 percent in 2011 and Basci last week also maintained his forecast for 4.0 percent growth this year, the same as in 2013 and up from 2.1 percent in 2012.
    The International Monetary Fund (IMF) has cut its 2014 growth forecast to 2.3 percent from a previous forecast of 3.5 percent, citing lower public consumption, and forecast inflation at 7.8 percent by the end of the year. The current account deficit is forecast to narrow to 6.3 percent.
    Turkey's Gross Domestic Product expanded by 0.5 percent in the fourth quarter from the third quarter for annual growth of 4.4 percent, slightly up from 4.3 percent in the third quarter.
    The central bank has been under pressure recently to cut rates to help stimulate economic growth. On April 4 Turkish Prime Minister Tayyip Erdogan, days after strong showing in local elections, called on Basci to convene an emergency meeting of the bank's monitor policy committee and cut rates.
    Basci responded a few days later by saying measured rate cuts were possible, but there was no reason for an emergency meeting and the bank alone would decide on the timing of the rate cuts. The central bank's rate rise in January had come shortly after Erdogan spoke out against higher rates.
    The rate rise in January was in response to a fall in the Turkish lira to a record low of 2.39 to the U.S. dollar on Jan. 27. Since then it has strengthened, helped by a more favorable view of emerging markets by global investors.
    Today the lira rose in response to the central bank's decision to maintain rates, hitting 2.13 to the dollar from 2.15 yesterday, the same rate as at the end of 2013.


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