Tuesday, December 22, 2015

Turkey holds rate, to simplify policy next year, lira falls

    Turkey's central bank left its benchmark one-week repo rate steady at 7.50 percent but said it would start to simplify its monetary policy at the next meeting of its monetary policy committee as long as the recent decline in volatility in financial markets continues.
    But the Central Bank of the Republic of Turkey (CBRT), which has cut its rate by 75 basis points this year, also repeated its recent guidance that it would maintain its tight monetary policy stance in light of inflation expectations, the behavior of prices and other factors that affect inflation.
     The central bank has been under pressure from President Tayyip Erdogan to lower rates to stimulate growth but the central bank, including its governor Erdem Basci, has resisted the pressure and some economists have called for higher rates in light of continued high inflation and depreciation of the lira currency, especially following last week's policy tightening by the U.S. Federal Reserve.
    In response to the CBRT's decision, the lira fell to around 2.94 to the U.S. dollar from 2.92 prior to the decision to be down almost 21 percent this year.
    Inflation in Turkey has been fueled by the depreciation of the lira since the "taper tantrum" in the summer of 2013 and in November the inflation rate rose to 8.1 percent from 7.58 percent the previous month, sparking fresh speculation that the central bank would raise rates today.
    But the central bank repeated that while energy prices are having an favorable impact on inflation, the "cumulative exchange rate movements delay the improvement in the core indicators," and future monetary policy decision will be conditional on the inflation outlook.
    Earlier this month the central bank forecast that inflation would ease to 6.5 percent at the end of 2016 and the target for the next three years would remain at 5.0 percent, plus an uncertainty band of 2 percentage points above and below.
    The central bank uses a relatively wide interest rate corridor system to implement its policy but released in in August last year a so-called road map for how it would implement policy during the "normalization of global monetary policies," a reference to the Federal Reserve's tightening.
    As part of the roadmap, the central bank will narrow its interest rate corridor and make it more symmetric around the one-week repo rate.
    In addition to keeping the one-week repo rate steady at 7.25 percent, the central bank maintained the marginal funding rate at 10.75 percent and the borrowing rate at 7.25 percent.

   The Central Bank of the Republic of Turkey released 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. The composition of growth has shifted towards net exports 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 cumulative exchange rate movements delay the improvement in the core indicators. Considering the impact of the uncertainty in global markets on inflation expectations and taking into account the volatility in energy and unprocessed food prices, the Committee stated that the tight liquidity stance will be maintained 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. The Committee indicated that, should the decline in volatility observed after the start of the global policy normalization persist, monetary policy simplification steps would begin with the next meeting.
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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