The Central Bank of the Republic of Turkey (CBRT), which raised its repo rate by 550 basis points on Jan. 28 in response to a sharp fall in the lira currency, said its Monetary Policy Committee had decided on a "measured decrease" in the rate following a recent decline in market interest rates, which reflected a fall in uncertainties and an improvement in Turkey's risk premium.
"The Committee stated that with a flat yield curve after this decision, the monetary policy stance will continue to be tight," the central bank said.
Economists had been divided about the central bank's decision today, with most expecting it to maintain rates as inflation remains high and expectations have recently risen.
Turkey's inflation rate rose further to 9.38 percent in April, the fifth consecutive month of accelerating inflation, and up from the 2013 average of 7.5 percent. Erdem Basci, the central bank's governor said last week that inflation would peak soon in response to the bank's tighter policy and he is determined to bring it back down to the bank's 5.0 percent target in 2015.
This year, however, inflation is expected to remain above the bank's target, as in recent years.
Basci and the central bank's policy committee has been under heavy political pressure by Prime Minister Tayyip Erdogan to cut rates.
The rate hike in January came only days after Erdogan spoke out against a rate rise amid a scandal and accusations against the government for graft. In early April the prime minister then called on the bank to convene an emergency meeting to cut rates. While Basci responded that the bank alone would decide on rates, he also acknowledged that measured rate cuts were possible.
In its statement today, the CBRT also said loan growth was continuing at reasonable levels in response to its tight policy stance and other macro prudential measures, with domestic demand modest, supporting a decline in inflation and leading to a significant improvement in the current account deficit this year.
The central bank also said it expects Turkey's exports to rise due to a recovery in foreign demand.
Turkey's exports have been rising steadily while imports have been slowly declining. In March exports rose to US$ 14.747 billion while imports also rose to $19.942 billion.
But the current account deficit has been narrowing in recent months. The deficit was largely steady in March at $3.194 billion but sharply below December's deficit of $8.357 billion.
Turkey's Gross Domestic Product expanded by 0.5 percent in the fourth quarter of 2013 from the third quarter for annual growth of 4.4 percent, largely steady in the last three quarters.
Following the bank's sharp rate rise in January, the central bank has maintained that it would keep a tight policy stance until the outlook for inflation has improved.In addition to raising the one-week repo rate in January, the central bank 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.
Last month the central bank took the first step toward unwinding its tight stance, trimming the late liquidity window rate by 150 basis points to 13.5 percent in response to a decline in uncertainties and better risk premiums. Today the lending rate at the late liquidity window was maintained at 13.5 percent and the borrowing rate at 0 percent.
Turkey was among the emerging market countries that were hit hard last year by capital outflows by global investors when the U.S. Federal Reserve started to prepare markets for the shift in its monetary policy and reduced asset purchases.
Turkey's lira fell throughout last year until Jan. 24 this year when it hit 2.336 to the U.S. dollar, down from 1.78 at the end of 2012, a depreciation of 24 percent.
But since then it has rallied, quoted at 2.09 to the dollar today, up 2.8 percent this year.