Tuesday, February 23, 2016

Turkey holds rate, confirms inflation to determine moves

    Turkey's' central bank left its benchmark repo rate unchanged at 7.50 percent and confirmed its guidance that "future monetary policy decisions will be conditional on the inflation outlook" and that a tight policy stance will be maintained in light of inflation expectations.
    The Central Bank of the Republic of Turkey (CBRT), which lowered its key rate by 75 basis points last year, also repeated its view from January that energy prices were having a favorable affected on inflation while other cost factors were limiting the improvement in core inflation indicators.
    Turkey's headline inflation rate accelerated to 9.58 percent in January from a 2015-high of 8.81 percent December, moving further away from the central bank's target of 5 percent.
    It is the fifth year in a row that inflation has topped the central bank's target. Core inflation rose to 9.7 percent in December from 9.5 percent in November 2015.
    Last month the CBRT raised its 2016 inflation forecast to 7.5 percent from 6.5 percent due to the impact of the government's 30 percent increase in minimum wages, the impact of past depreciation of the lira currency and a continued rise in food prices.
   The central bank expects inflation to ease to 6 percent in 2017 and then hit 5 percent in 2018.
    Earlier this month the International Monetary Fund (IMF) called on the central bank to tighten its policy stance "decisively" in order to bring inflation back to its target, a move that would help anchor inflation expectations and ease some of the pressure on the lira.
    It said the higher minimum wage will raise consumption by an estimated 0.5 to 1 percent of Gross Domestic Product this year, with growth forecast between 3.5 percent and 4 percent compared with 2015 growth estimated at 3.8 percent.
    The IMF's view echoes that of economists who say the central bank needs to raise rates to help bolster its credibility. Turkey's president, Tayyip Erdogan, has long called for lower rates, arguing that high rates are fueling inflation.
    The lira started falling in response to the "taper tantrum" of May 2014 and fell 20 percent against the U.S. dollar in 2015. This year it has been relatively stable, quoted at 2.93 to the dollar today, largely unchanged from 2.92 at the start of the year.
     In its statement, the CRBR made no reference to simplifying its interest rate structure. The CBRT said in August that it would shift to a single policy rate from its current wide corridor and lower the distance between the upper and lower rates.
    However, the bank's governor Erdem Basci, whose term expires at the end of March, said last month that financial markets remain too volatile and the change in rate structure will first be considered when global uncertainties ease.

    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. Demand from the European Union economies continues to support exports at an increasing pace, despite elevated geopolitical risks in other export markets. 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 other cost factors limit the improvement in the core indicators. Considering the wage developments and the impact of the uncertainty in global markets on inflation expectations and pricing behavior 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. 
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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