By CentralBankNews.info
Turkey’s central bank continued to take “measured steps towards simplification” of its interest rate structure by cutting the upper band of its rate corridor for the fourth month in a row but maintained its tight monetary policy and liquidity stance to ensure that the resilience of the country’s economy against global financial volatility and inflation.
The Central Bank of the Republic of Turkey (CBRT) cut the overnight marginal funding rate by another 50 basis points to 9.0 percent but left the overnight borrowing rate at 7.25 percent, a move that was expected by most economists.
The late liquidity lending rate was also cut by 50 basis points to 10.5 percent while the borrowing rate was unchanged at 0 percent.
But the benchmark one-week repo rate was left at 7.50 percent, unchanged since February 2015, as the central bank cites inflation expectations, pricing behavior and “other factors,” a likely reference to the need to keep rates high enough to avoid depreciation of the lira.
The overnight marginal funding rate has now been cut by 175 basis points since March, with the CBRT citing the “marked decline” in inflation in recent months due to unprocessed food prices.
But unlike last month, the CBRT said the trend in core inflation had improved. Last month it said the underlying trend in core inflation remained limited.
Turkey’s headline inflation rate was largely unchanged in May at 6.58 percent compared with 6.57 percent in April while the core inflation rate eased to 8.8 percent from 9.3 percent.
The central bank targets inflation of 5 percent and a recent survey by the CBRT showed inflation is expected to reach 7.64 percent by the end of this year.
The exchange rate of Turkey’s lira continues to be relatively stable and was trading at 2.89 to the U.S. dollar today, 1 percent higher than at the start of this year.
The CBRT reiterated its assessment of the economic activity as displaying “a moderate and stable course of growth,” with domestic demand helping growth and demand from the European Union supporting Turkish exports.
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 9.5 percent to 9 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 11 percent to 10.5 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, the global volatility has increased to some extent. The Committee assesses that 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 increase the resilience of the economy against shocks. In this respect, the Committee decided to take a measured step towards simplification.
Inflation has displayed a marked decline in recent months, mainly due to favorable course of unprocessed food prices and the improvement in the core inflation trend. However, the developments in services inflation and unit labor costs 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.
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.”