Thursday, March 24, 2016

Turkey holds key rate, begins simplifying rate structure

    Turkey's central bank left its benchmark repo rate steady at 7.50 percent but trimmed its overnight marginal funding and late liquidity lending rates by 25 basis points as it takes a first step in simplifying its interest rate structure in response to an easing of volatility in global financial markets.
    However, the Central Bank of the Republic of Turkey (CBRT) added that it would still maintain a tight policy stance as the improvement in underlying core inflation "remains limited."
     Last August the CBRT said in a road map that it would simplify its rate structure by narrowing its wide interest rate corridor and shift to a single policy rate. However, the process of simplifying this structure would first begin when there was less uncertainty in global financial markets.
    With today's decision, the central bank's overnight funding rate was cut to 10.5 percent while the borrowing rate was maintained at 7.25 percent. The lending rate in the late liquidity window was cut to 12.0 percent while the borrowing rate was maintained at 0.0 percent.
    The central bank's cut to the upper band of its rate corridor was expected by some economists and comes at what was expected to be Governor Erdem Basci's last monetary policy meeting before his term ends in April. A successor has yet to be named.
     Turkey's lira, which has been falling since the "taper tantrum" in May 2013, has recently reversed course in light of improved global sentiment toward emerging markets. After falling 20 percent against the U.S. dollar in 2015, the lira has gained 1.4 percent this year, quoted at 2.88 today.
    Turkey's consumer price inflation rate eased to 8.78 percent in February from 9.58 percent in January while core inflation rose to 9.7 percent from 9.6 percent.
    In January the CBRT raised its 2016 inflation forecast to 7.5 percent from 6.5 percent on the government's 30 percent increase in minimum wages, the impact of past depreciation of the lira and a continued rise i food prices.
     Inflation is seen easing to 6 percent in 2017 and then hit the central bank's target of 5 percent in 2018.
    The central bank said loan growth in Turkey was continuing at "reasonable rates" in response to the tight monetary policy and macro prudential measures, with demand from Europe supporting exports at an increasing pace despite elevated risks in other export markets.
    It added that structural reform measures by the government should help boost potential growth.

    The Central Bank of the Republic of Turkey issued the following statement:

"The Monetary Policy Committee (the Committee) has decided to set the short term interest rates as follows:
a)    Overnight Interest Rates: Marginal Funding Rate has been reduced from 10.75 percent to 10.5 percent, and borrowing rate has been kept at 7.25 percent,
b)    One-week repo rate has been kept at 7.5 percent,
c)    Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate has been kept at 0 percent, and lending rate has been reduced from 12.25 percent to 12 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.
Recently, global volatility has eased to some extent. Moreover, with the use of the policy instruments laid out in the road map published in August 2015 effectively, the need for a wide interest rate corridor has been reduced. In this respect, the Committee decided to take a measured step towards simplification. However, improvement in the underlying core inflation trend remains limited, necessitating the maintenance of a tight liquidity stance.
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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