The Central Bank of the Republic of Turkey (CBRT), which has cut its rate by 75 basis points this year as it slowly unwinds a 550 point emergency rate hike in January 2014, added that its board had also discussed a road map and strategy to be implemented before and after the normalization of global monetary policy, a reference to expected rate increases by the U.S. Federal Reserve.
The CBRT was expected to keep its benchmark rates steady and shift toward a more conventional monetary policy with a single benchmark rate instead of the current system in which overnight rates in a corridor can be varied daily in response to the lira's exchange rate.
The road map, which was published today, sets out various measures for how the CBRT will adjust its liquidity management and foreign exchange policy, including how it will make the interest rate corridor "more symmetric around one-week repo interest rate and the width of the corridor will be narrowed," starting with the normalization of global monetary policies.
The road map also details measures to be undertaken "before normalization," including changes to the funding system and a more flexible selling of foreign exchange to reduce volatility, and changes to reserve ratios for both foreign exchange liabilities and lira liabilities.
But while the CBRT will tighten liquidity and thus support the lira, it also repeated its recent guidance that "future monetary policy decisions will be conditional on the improvements in the inflation outlook" and a "cautious monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook."
Turkey's headline inflation rate eased to 6.81 percent in July from 7.2 percent in June, helped by lower prices of energy and processed food, but the CBRT added that exchange rate movements had delayed the improvement in core indicators, with core inflation at 7.6 percent, down from 7.9 percent.
Like most other emerging market currencies, the lira has been depreciating against the U.S. dollar since May 2014 and since July this year it has fallen continuously. Today it fell further to 2.90 to the dollar from 2.87 yesterday to be down almost 20 percent this year.
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.
Processed food and energy price developments affect inflation favorably in the short run, while exchange rate movements delay the improvement in the core indicators. Considering this delay and taking into account the uncertainty in domestic and global markets and the volatility in energy and food prices, the Committee decided to implement a tighter liquidity policy as long as deemed necessary. Moreover, the Committee also discussed the roadmap to be implemented before and after global monetary policy normalization and decided to publish a strategy document with today’s policy statement.
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."