By CentralBankNews.info
Turkey’s central bank maintained its short-term interest rates, including the one-week repo rate at 10.0 percent, and reiterated that a “tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook.”
At an emergency meeting of its policy committee last month, the Central Bank of the Republic of Turkey (CBRT) raised its rates in response to a sharp fall in the lira currency and growing inflationary pressures, and pledged to maintain a tight stance until the outlook for inflation improved.
Following today’s meeting, the central bank said inflation was likely to hover above its 5.0 percent target “for some time due to recent tax adjustments, exchange rate developments, and elevated food prices” while the current account deficit was expected to show a “significant improvement” this year.
The growth of lending has slowed due to its tight policy stance, weak capital flows and other measures and data from the first quarter of this year showed a deceleration in domestic demand.
“Meanwhile, with the help of the recovery in foreign demand, the contribution of net exports to economic growth in expected to increase,” the CBRT said.
Turkey’s inflation rate rose to 7.75 in January from 7.4 percent in December.
In its January inflation report, the CBRT raised its 2014 inflation forecast by 1.3 percentage points, with the lira’s depreciation accounting for an estimated 0.5 percentage points of that increase and higher taxes for another 0.5 percentage points.
The central bank forecast that inflation would to ease in the second half of this year and fluctuate between 5.2 percent and 8.0 percent before ending the year at 6.6 percent.
In 2015 inflation is projected to fall further, fluctuating between 3.1 precedent and 6.9 percent, and stabilize around the bank’s 5.0 percent target by mid-2015.
In addition to raising its one-week repo rate to 10.0 percent from 4.50 percent on Jan. 28, the CBRT also said this would once again become its primary tool for providing liquidity to markets. At that meeting, 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, or the floor, to 8.0 percent from 3.5 percent.
“It should be emphasized that any new data or information may lead the Committee to revise its stance,” the CBRT said today.
In the summary of its Jan. 28 meeting, the central bank said that the current policy stance should be enough to anchor inflation expectations and if necessary, its liquidity policy may be tightened further to invert the slope of the yield curve.
Economists had expected the central bank to maintain rates today after last month’s surprisingly aggressive move that helped calm financial markets and seems to have put a floor under the lira.
The lira has been declining ever since early May 2013 and fell to a record low of 2.37 to the U.S. dollar on Jan. 27. Since the rate hike, the lira has strengthened by 8 percent, but is still down 1.4 percent since the beginning of the year. The lira was trading at 2.18 to the dollar today.
Turkey’s current account deficit widened to US$ 8.322 billion in December from November’s $4.098 billion while its Gross Domestic Product expanded by 0.9 percent in the third quarter from the second quarter for annual growth of 4.4 percent, down from the second quarter’s 4.5 percent rate.
Earlier this month, Standard & Poor’s cut its outlook on Turkey to negative from stable, citing risks of a hard economic landing amid a less predictable political environment. The rating’s agency said a corruption scandal involving the government of Prime Minister Tayyip Erdogan along with falls in the lira and inflationary pressures had raised concerns about political and economic stability.
