The Central Bank of the Republic of Turkey (CBRT) has now cut the repo rate by 175 basis points since May after raising the rate by 550 points on Jan. 28 in response to a fall in the lira currency.
In January the CBRT also shifted its overnight interest rate corridor sharply upwards by raising the marginal funding rate, or the ceiling, to 12.0 percent from 7.75 percent, and the borrowing rate, or the floor, to 8.0 percent from 3.5 percent.
Today the central bank left the overnight funding rate steady but cut the borrowing rate by 50 basis points to 7.50 percent, a likely first step in moving the corridor downwards.
"The adverse impact of exchange rate developments since mid-2013 on annual inflation is gradually tapering off," the central bank said, a reflection that inflation eased to 9.16 percent in June from a recent high of 9.66 percent in July, the culmination of six months of rising inflation.
The decline in inflation is a vindication of the central bank's assertions in recent months that inflation was expected to decline in June and the governor, Erdem Basci, has said he is determined to bring inflation back to the bank's 5.0 percent target in 2015.
The central bank has come under heavy political pressure from Prime Minister Tayyip Erdogan to reduce rates more quickly and roll back the sharp rate hike in January.
Elevated food prices have been the main factor limited the pace of decline in inflation, the central bank said today, adding that in light of the recent improvement in global liquidity, it had decided on another "measured cut in the one-week repo rate."
The central bank has described its three recent rate cuts as "measured" but has been under heavy political pressure to reduce rates more quickly and roll back the sharp rate hike in January.
The rates at the central bank's late liquidity window were maintained, with the lending rate at 13.5 percent and the borrowing rate at zero percent.
After plunging in January in response to a bout of volatility in emerging market currencies after the the U.S. Federal Reserve began reducing its asset purchases, Turkey's lira currency has gained strength and was trading around 2.125 to the U.S. dollar today, up 1.1 percent since the beginning of the year and and 9.2 percent since hitting a record low of 2.34 on Jan. 24.The central bank said loan growth in Turkey was continuing a reasonable levels in response to its tight stance and macro prudential measures while domestic demand was on a "modest course."
"Meanwhile, with the help of the recovery in foreign demand, exports contribute positively to economic growth," the CBRT said, adding this should support disinflation and lead to a significant improvement in the current account balance in 2014.
Turkey's current account deficit declined to US$ 3.434 billion in May from $4.821 billion in April after reaching 7.9 percent of the country's Gross Domestic Product in 2013.
GDP expanded by 1.7 percent in the first quarter of this year from the previous quarter for annual growth of 4.3 percent, slightly down from 4.4 percent in the fourth quarter of 2013.