Wednesday, October 21, 2015

Turkey holds rates, guidance omits flat yield curve

     Turkey's central bank left its benchmark one-week repo rate unchanged at 7.50 percent, as expected, and confirmed the main point of its recent guidance that "future monetary policy decisions will be conditional on the inflation outlook."
    But the Central Bank of the Republic of Turkey (CBRT), which has cut its rate by 75 basis points this year, also tweaked its guidance slightly by dropping previous references to keeping a flat yield curve until there is a significant improvement in the inflation outlook.
    But the CBRT still confirmed that it would continue to maintain tight liquidity in light of uncertainty in domestic and global financial markets and volatile energy and food prices.
    Although the decline in energy prices has impacted inflation in a favorable way, the CBRT repeated that exchange rate movements had delayed an improvement in core inflation.
    Turkey's inflation rate rose to 7.95 percent in September from 7.14 percent in August while the Turkish lira has strengthened in the last month following steady depreciation since the "taper tantrum" in May 2013 when many emerging market currencies were hit by capital outflows after the U.S. Federal Reserve said it was considering scaling back asset purchases.
    The lira was trading at close to 2.90 to the U.S. dollar today, up from lows around 3 to the dollar in late September but down 20 percent since the start of the year.
    While Turkey's economy has been hit by weak demand for its exports, the central bank said domestic demand is continuing to contribute to growth "moderately" while exports should start to improve as demand from the European Union strengthens.
   Turkey's Gross Domestic Product expanded by 1.3 percent in the second quarter from the first quarter for annual growth of 3.8 percent, up from 2.5 percent.

    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, 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.
Annual loan growth continues at reasonable rates 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 remained weak in the first half of the year, while domestic demand contributed to growth moderately. The composition of growth is expected to shift gradually towards net exports in upcoming periods with the support of rising demand from the European Union economies. The Committee assesses that the implementation of the announced structural reforms would contribute to the potential growth significantly.
Energy price developments affect inflation favorably, while exchange rate movements delay the improvement in the core indicators. Considering the impact of the uncertainty in domestic and global markets on inflation expectations and taking into account the volatility in energy and food prices, the Committee decided to maintain the tight liquidity stance as long as deemed necessary.
Future monetary policy decisions will be conditional on the inflation outlook. Taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.
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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