Wednesday, December 24, 2014

Turkey holds rates, tight stance until inflation drops

    Turkey's central bank maintained its short-term interest rates, including the benchmark repo rate at 8.25 percent, as expected, and confirmed its guidance that the "tight monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook."
    The Central Bank of the Republic of Turkey (CBRT), which raised its repo rate by 550 basis points in January and then cut it by 175 points from May through July, added that it expects inflation to decline in 2015, and at a faster pace in the first half of next year, as forecast in its Inflation Report.
    In its latest inflation report from Oct. 31, the CBRT forecasts inflation in 2015 to decline to a mid-point of 6.1 percent - within a range of 4.6 and 7.6 percent - before stabilizing around 5 percent in the medium term.
    But the decline in oil prices is likely to push down inflation further in 2015 to around 5 percent, the central bank governor, Erdem Basci, said this month. The CBRT targets inflation of 5.0 percent.
    Turkey's consumer price inflation rate rose to 9.15 percent in November from 8.96 percent in October while the core inflation rate eased to 9.0 percent from 9.1 percent.
    The central bank has been under political pressure to cut its rates and while the drop in oil, and thus inflation, could led to rate cuts, the decline in the Turkish lira currency against the U.S. dollar - along with most other emerging markets - is making import prices more expensive.
    The lira has been depreciating fast in the last month and was trading at 2.32 to the dollar today, down 7.33 percent since the start of the year.

    The Central Bank of the Republic of Turkey issued the following statement:
"Participating Committee Members
Erdem Başçı (Governor), Ahmet Faruk Aysan, Turalay Kenç, Necati Şahin,  Abdullah Yavaş, Mehmet Yörükoğlu. 
The Monetary Policy Committee (the Committee) has decided to keep the short term interest rates constant at the following levels:
a) Overnight Interest Rates: Marginal Funding Rate at 11.25 percent, the interest rate on borrowing facilities provided for primary dealers via repo transactions at 10.75 percent, and borrowing rate at 7.5 percent,
b) One-week repo rate at 8.25 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate at 0 percent, and lending rate at 12.75 percent.
Loan growth continues at reasonable levels in response to the tight monetary policy stance and macroprudential measures. The favorable developments in the terms of trade and the moderate course of consumer loans will contribute to the improvement in the current account balance. External demand remains weak, while the contribution of domestic demand to growth is at moderate levels. The Committee assessed that the implementation of the announced structural reforms would contribute to the potential growth significantly.
Macroprudential measures taken at the beginning of the year and the tight monetary policy stance continue to have a favorable impact on the core inflation trend. Moreover, declining commodity prices, in particular oil prices, will contribute to disinflation.
Under the current monetary policy stance, the Committee anticipates that, inflation will decline in line with the forecast presented in the Inflation Report throughout 2015, at a faster pace in the first half of the year. Inflation expectations, pricing behavior and other factors that affect inflation will be closely monitored and the tight monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook.
It should be emphasized that any new data or information may lead the Committee to revise its stance.
The summary of the Monetary Policy Committee Meeting will be released within five working days."


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