Turkey holds rates on uncertain markets, volatile energy

May 20, 2015

By CentralBankNews.info
    Turkey’s central bank maintained its policy rates, including the one-week repurchase rate at 7.50 percent, repeating its statement from recent months that its ongoing “cautious” monetary policy is having a favorable impact on inflation but uncertainty in global markets and volatile energy and food prices  “makes it necessary to maintain the cautious stance in monetary policy.”
    The Central Bank of the Republic of Turkey (CBRT), which has cut its rate by 75 basis points this year, also repeated that “future monetary policy decisions will be conditional on the improvements in the inflation outlook” and the current cautious policy stance will be maintained by keeping a flat yield curve “until there is a significant improvement in the inflation outlook.”
    The CBRT’s decision to maintain rates today was widely expected.
    The central bank has been fighting to push down inflation that has been fueled by a depreciation of the lira. The lira has been falling for the last two years, hit by a reversal in capital flows ahead of an expected tightening in U.S. monetary policy and worries over the political influence on the central bank and its credibility.
    Last week European Union finance minsters were reported to have told Turkey that a tighter policy stance is needed to lower inflation and expressed their displeasure at President Tayyip Erdogan’s pressure on the central bank to cut interest rates.
     The CBRT raised its repo rate by 550 basis points in January 2014 in response to capital outflows and a plunge in the lira and has been slowly unwinding this hike despite intense political pressure to cut rates much faster ahead of a June general election.
     Turkey’s consumer price inflation rate rose to 7.91 percent in April from 7.61 percent in March, well above the central bank’s 5.0 percent target. The core inflation rate eased to 8.1 percent from 8.9 percent.
     The central bank noted that its policy, along with prudent fiscal and macroprudential policies, had have a favorable impact on inflation, especially core inflation that excludes energy and food prices.
    “However, recently elevated volatility in the exchange rates has limited the improvement in the core inflation,” the central bank said.
    The lira has been strengthening in the last week and was trading at 2.6 to the U.S. dollar today, up from a record low of 2.74 on April 24 but down 10 percent from the start of the year and 17 percent since the start of 2014.

    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, the interest rate on borrowing facilities provided for primary dealers via repo transactions at 10.25 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.
Loan growth continues at reasonable levels 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. External demand remains weak, while domestic demand contributes to growth moderately. The Committee assesses that the implementation of the announced structural reforms would contribute to the potential growth significantly.
The ongoing cautious monetary policy along with prudent fiscal and macroprudential policies continue to have a favorable impact on inflation, especially inflation excluding energy and food (core inflation indicators). However, recently elevated volatility in the exchange rates has limited the improvement in the core inflation, as stated in the Inflation Report. This, combined with the uncertainty in global markets and volatility in energy and food prices, makes it necessary to maintain the cautious stance in monetary policy. Accordingly, the Committee has decided to keep the interest rates at current levels.
Future monetary policy decisions will be conditional on the improvements in the inflation outlook. Inflation expectations, pricing behavior and other factors that affect inflation will be monitored closely and the cautious monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook.
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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