Tuesday, March 17, 2015

Turkey holds rate on uncertain global markets, high food

     Turkey's central bank maintained its key policy rates, including the benchmark one-week repurchase rate at 7.50 percent, citing the need to maintain a cautious monetary policy stance in light of "uncertainty in global markets and elevated food prices."
    The Central Bank of the Republic of Turkey (CBRT), which has unwound 250 basis points of a 550 point emergency rate hike from January 2014, repeated its recent guidance that future rate decisions would hinge on an improvement in the inflation outlook and it would maintain a flat yield curve "until there is a significant improvement in the inflation outlook." 
    The central bank's decision was largely expected as Turkish assets are considered vulnerable to any jitters in global financial markets from the pending shift in U.S. monetary policy and months of political pressure on the CBRT to cut rates appears to have calmed down following a meeting last week between CBRT Governor Erdem Basci and Turkish President Recep Tayyip Erdogan.
    Turkey's lira came under strong pressure during the so-called "taper tantrum" in the Spring of 2013 but then rebounded in the first few months of 2014. But this year it has depreciated sharply, with economists attributing this to concern by international investors over the central bank's independence amidst intense political pressure, especially by Erdogan.
    But since the meeting between Basci and Erdogan, the lira appears to have stabilized and rose slightly in response to the central bank's decision to maintain rates. 
    It was trading at 2.61 to the U.S. dollar today, up from historic lows around 2.64 last week, but still down 10.7 percent this year.

    The CBRT said its "cautious monetary policy" along with prudent fiscal and macro prudential polices were having a favorable impact on inflation, especially core inflation. And while external demand remains weak, domestic demand is contributing to growth.
    Turkey's consumer price inflation rate rose slightly to 7.55 percent in February from January's 7.24 percent, but is still well down from highs approaching 10 percent in mid-2014. Core inflation rose to 8.9 percent in February from January's 8.8 percent.

    The Central Bank of the Republic of Turkey issued the following statement:    

"Meeting Date: March 17, 2015
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 keep the short term interest rates constant at the following levels:
a) Overnight Interest Rates: Marginal Funding Rate at 10.75 percent, the interest rate on borrowing facilities provided for primary dealers via repo transactions at 10.25 percent, and borrowing rate at 7.25 percent,
b) One-week repo rate at 7.5 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 12.25 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). Yet, uncertainty in global markets and elevated food prices necessitates maintaining the cautious stance in monetary policy. Accordingly, the Committee decided to keep the interest rates at current levels.
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."


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