Turkey holds rates as fall in lira keeps inflation high
Turkey's central bank kept its key policy rates steady, as expected, and repeated its recent guidance that "the cautious 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 has cut its key repo rate by 75 basis points this year to 7.50 percent, said inflation was expected to decline in the short term due to a change in food prices but movements in exchange rates delayed an improvement in core inflation.
"This, combined with the uncertainty in global markets and volatility in energy and food prices, makes it necessary to maintain the cautious stance in monetary policy," the CBRT said.
Turkey's lira has been depreciating since early 2014 and hit a record low of 2.80 to the U.S. dollar on June 8 following national elections that dealt a setback to the country's ruling party - headed by President Tayyip Erdogan, a fervent critic of the central bank - after 13 years in power.
Sincethen the lira has firmed slightly, trading at 2.67 to the dollar for a depreciation of 12.7 percent this year and almost 20 percent since the start of 2014.
Turkey's headline inflation rate rose to 8.09 percent in May from 7.91 percent in April while the core rate rose to 7.9 percent from 7.5 percent.
The central bank said loan growth continues to be reasonable and the favorable change in the terms of trade, along with moderate consumer loans, is improving the current account. While external demand remains weak, domestic demand is contributing to growth and an implementation of announced structural reforms would help potential growth "significantly."
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 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.
Inflation is expected to decline in the short term owing to a partial correction in food prices. Yet, recent movements in the exchange rates have delayed the improvement in the core indicators. This, combined with the uncertainty in global markets and volatility in energy and food prices, makes it necessary to maintain the cautious stance in monetary policy. The Committee has therefore 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."