The Central Bank of the Republic of Turkey (CBRT), which has been under heavy political pressure to quickly unwind a 550 basis points rate hike in January 2014, also repeated its recent guidance that it would continue to closely monitor inflationary expectations and maintain a flat yield curve until there is a significant improvement in the inflation outlook.
Last month the CBRT cut its benchmark rate by 50 basis points, continuing the gradual process of lowering the rate from the 10.0 percent that was imposed in January 2014 in response to a sharp fall in the lira currency as emerging markets were hit by a bout of currency volatility.
In addition to lowering the one-week repo rate, the CBRT today also cut its overnight marginal funding rate on repo transactions by 50 basis points to 10.75 percent, the borrowing rate for primary dealers to 10.25 percent from 10.75 percent and the central bank's borrowing rate to 7.25 percent from 7.50 percent.
The borrowing rate in the late liquidity window was maintained at 0 percent while the lending rate was cut to 12.25 percent from 12.75 percent.
Turkey's consumer price inflation rate eased to 7.24 percent in January from 8.17 percent in December and core inflation fell to 8.8 percent in December from 9.0 percent in November.
The CBRT said it expects the downward trend in core inflation to continue but added a cautious approach to monetary policy was required to reach a permanent decline in inflation.
The Turkish lira currency started depreciating in April 2013 when it was around 1.8 to the U.S. dollar and hit an all-time low of 2.51 on Feb. 11 this year following renewed calls by Turkey's president, Recep Tayyip Erdogan, on the central bank to cut interest rates.
The Central Bank of the Republic of Turkey issued the following statement:
Participating Committee Members
Erdem Başçı (Governor), Ahmet Faruk Aysan, Murat Çetinkaya, Turalay Kenç, Necati Şahin, Abdullah Yavaş, Mehmet Yörükoğlu.
The Monetary Policy Committee (the Committee) has decided to set the short term interest rates as follows:
a) Overnight Interest Rates: Marginal Funding Rate has been reduced from 11.25 percent to 10.75 percent, the interest rate on borrowing facilities provided for primary dealers via repo transactions has been reduced from 10.75 percent to 10.25 percent, and borrowing rate has been reduced from 7.5 percent to 7.25 percent,
b) One-week repo rate has been reduced from 7.75 percent to 7.5 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate has been kept at 0 percent, and lending rate has been reduced from 12.75 percent to 12.25 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 contribute to the improvement in the current account balance. External demand remains weak, while domestic demand contributes to growth moderately. The Committee assesses that the implementation of the announced structural reforms would contribute to the potential growth significantly.
The ongoing cautious monetary policy along with prudent fiscal and macroprudential policies are having a favorable impact on inflation, especially inflation excluding energy and food (core inflation indicators), and inflation expectations. The Committee anticipates that the core inflation will continue to decline. Yet, a more persistent reduction in inflation necessitates a cautious approach in monetary policy. Taking into account the elevated volatility in food and energy prices, the Committee decided to cut the interest rates at a measured scale.
Future monetary policy decisions will be conditional on the improvements in the inflation outlook. Inflation expectations, pricing behavior and other factors that affect inflation will be monitored closely and the cautious 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."