Turkey's central bank trimmed its benchmark one-week repo rate by another 75 basis points to 8.75 percent but maintained the rates on its overnight rate corridor and said "inflation is expected to decline markedly starting from this month."
The Central Bank of the Republic of Turkey (CBRT) raised its repo rate by 550 basis points in January in response to a sharp decline in the lira currency but said today that "the adverse impact of exchange rate developments since mid-2013 on annual inflation will gradually taper off."
The CBRT's second rate consecutive rate cut was widely expected after central bank Governor Erdem Basci last week said a "measured, moderate and gradual rate cut is being priced in."
In addition to the expectation of lower inflation, the CBRT said the recent improvement in global liquidity had provided it room "to deliver a measured cut in the one-week repo rate."
"Inflation expectations, pricing behavior and other factors that affect inflation will be closely monitored and the tight monetary policy stance will be maintained by keeping a flat yield curve until there is a significant improvement in the inflation outlook," the bank said.
Since January, the central bank has said it would keep a tight policy stance until there is a significant improvement in the inflation outlook, disappointing some politicians, including Prime Minister Tayyip Erdogan who has called on the central bank to reduce its rates, saying high interest rate are the cause of high inflation.
In May the CBRT cut its repo rate by 50 basis points and it has now rolled back the rate rise from Jan. 28 by 125 basis points.
After the "measured" rate cut in May, Erdogan accused the central bank of "kidding" the nation.
Turkey's headline inflation rate rose further to 9.66 in May from 9.38 percent in April, the sixth consecutive month of accelerating prices and up from 2013's average 7.5 percent.
Basci has often forecast that inflation would soon peak and then start to fall in response to the central bank's tighter policy, underscoring that he is determined to bring it down to the bank's 5.0 percent target in 2015.
"Loan growth continues at reasonable levels in response to the tight monetary policy stance and macro prudential measures," the bank said today.
Recent data point to modest domestic demand, the bank said and together with a recovery in foreign demand, the central bank expects exports to contribute more to economic growth.
"The Committee expects that such a demand composition will support disinflation and will lead to a significant improvement in the current account balance in 2014," the bank said.
Turkey's current account deficit rose in April to US$ 4.788 billion from $3.194 billion in March with exports down to $13.448 billion from $14.747 billion as imports rose to $20.662 billion from $19.942 billion.
Turkey was among the hardest hit emerging market countries last year when capital started to reverse and flow out in anticipation of stronger growth in advanced economies and the U.S. Federal Reserve's reduction in asset purchases.
The lira currency fell throughout 2013 and until Jan. 24 this year when it hit 2.336 to the U.S. dollar, down by 24 percent since the end of 2012. Since then it has gained strength though the rally stalled earlier this month, with the lira quoted at 2.13 to the dollar today, down from 2.08 on June 10.
Turkey's Gross Domestic Product expanded by 1.7 percent in the first quarter of this year from the previous quarter for annual growth of 4.3 percent, marginally down from 4.4 percent in the fourth quarter of 2013.
In addition to raising the one-week repo rate in January, the central bank also shifted its overnight rate corridor upwards by raising the marginal funding rate, the ceiling in the corridor, to 12.0 percent from 7.75 percent, and the borrowing rate, the floor in the corridor, to 8.0 percent from 3.5 percent.
In April the CBRT took the first step toward unwinding its tight stance, trimming the late liquidity window rate by 150 basis points to 13.5 percent in response to a decline in uncertainties and better risk premiums. Today the lending rate at the late liquidity window was maintained at 13.5 percent and the borrowing rate at 0 percent.
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