Tuesday, July 19, 2016

Turkey again trims upper rate, to add liquidity if needed

    Only days after a failed military coup, Turkey's central bank continued along its path towards simplifying the interest rate structure by lowering the upper limit of its rate corridor for the fifth consecutive month and maintaining a tight monetary policy stance due to the inflation outlook.
   And while the Central Bank of the Republic of Turkey (CBRT) again confirmed that its policy stance was linked to inflation, it added that "market developments will be closely monitored and the necessary liquidity measures will continue to the taken to support financial stability."
    On Sunday, following an attempted coup late Friday, the central bank assured the country's banks that it would provide them with "needed liquidity without limits," with intraday liquidity at zero percent, and foreign exchange could be used without limits to obtain lira liquidity.
    The central bank acknowledged that recent "domestic developments have led to fluctuations in financial markets," but that its liquidity measures had "alleviated the volatility" in markets.
    Turkey's lira and government bonds fell sharply in response to reports about military action late Friday. The lira quickly dropped 4 percent but recovered some of its losses on Monday and was trading at 2.98 to the U.S. dollar today compared with 2.88 on Thursday, down 3.4 percent. Compared with the start of the year, the lira is down 2.0 percent.
    While the CBRT maintained its benchmark one-week repo rate at 7.50 percent, it lowered the overnight marginal funding rate by 25 basis points to 8.75 percent and the late liquidity lending rate by 25 points to 10.25 percent.
    The overnight funding rate has now been cut by 200 basis points since March.
     But unlike last month, the CBRT said headline inflation may show "a marked increase" in the short term due to changes to unprocessed food and tobacco prices while the trend in core inflation is "expected to improve gradually."
    In June the central bank said inflation had showed a "marked decline in recent months" and the trend in core inflation had improved.
    Turkey's consumer price inflation rose to 7.64 percent in June from 6.58 percent in May on higher food prices while core inflation eased to 8.7 percent from 8.8 percent.

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

"Participating Committee Members

Murat Çetinkaya (Governor), Ahmet Faruk Aysan, Erkan Kilimci, Murat Uysal, Abdullah Yavaş.

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 9 percent to 8,75 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 10.5 percent to 10.25 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. While domestic demand continues to have a positive impact on growth, demand from the European Union economies continues to support exports. Accordingly economic activity displays a moderate and stable course of growth. The Committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly.
Recently, domestic developments have led to fluctuations in financial markets. The Committee assesses that the recent liquidity measures have alleviated the volatility in financial markets. Moreover, the tight monetary policy stance, the cautious macroprudential policies and the effective use of the policy instruments laid out in the road map published in August 2015 have increased the resilience of the economy against shocks. Also considering its contribution to the effectiveness of monetary policy, the Committee decided to take a measured and cautious step towards simplification.
The Committee has indicated that inflation may display a marked increase in the short term due to developments in unprocessed food and tobacco prices. Meanwhile, the core inflation trend is expected to improve gradually. Yet, the developments in inflation outlook necessitate 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. Moreover, market developments will be closely monitored and the necessary liquidity measures will continue to be taken to support financial stability.
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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