By CentralBankNews.info
Turkey’s central bank left its benchmark one-week repo rate at 7.50 percent but continued simplifying its monetary policy framework by once again cutting the overnight marginal funding rate and the late liquidity lending rate by a further 25 basis points.
The Central Bank of the Republic of Turkey (CBRT) confirmed its guidance from recent months, saying future monetary policy decisions will be conditional on the outlook for inflation and a tight policy stance will be maintained in light of inflation expectations, pricing behavior and other factors – a reference to the exchange rate – that affect inflation.
The central bank cut the overnight marginal funding rate to 8.50 percent from 8.75 percent and has now cut its by a total of 225 points since March. The borrowing rate was maintained at 7.25 percent.
The late liquidity lending rate was also cut to 10.0 percent from 10.25 percent while the borrowing rate was left at zero percent.
The once-week repo rate has been maintained at 7.50 percent since February 2015 as the CBRT remains cautious over inflation which rose in July to 8.79 percent from 7.64 percent in June due to a sharp rise in unprocessed food prices. Core inflation rose to 8.8 percent from 8.7 percent in June.
Although the central bank said it expects food prices to correct downward, the trend in core inflation is only seen improving gradually so the “developments in the inflation outlook necessitate the maintenance of a tight liquidity stance.”
In its quarterly inflation report from last month, the central bank expects inflation to stabilize around its 5.0 percent target as of 2018 after easing to an average of 7.5 percent this year and 6.0 percent in 2017.
Inflation is seen fluctuating between 6.6 percent and 8.4 percent in the rest of this year.
The exchange rate of Turkey’s lira has rebounded following a deep plunge in response to the failed military coup attempt in July, with the lira trading at 2.93 to the U.S. dollar today, largely unchanged from 2.92 at the start of the year.
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 8.75 percent to 8.5 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 10.25 percent to 10 percent.
Annual loan growth continues at reasonable rates in response to the tight monetary policy stance and macroprudential measures. Although developments in tourism revenues will have a negative impact in the short run, the lagged effects of the developments in the terms of trade and the moderate course of consumer loans will continue to contribute to the improvement in the current account balance. While domestic demand is having a positive impact on growth, albeit at a lesser extent, 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.
The adverse impact of domestic developments in mid-July on market indicators has been largely reversed due to improved global risk appetite and the recent measures. 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.
Unprocessed food prices, which have recently shown marked increases, are projected to display a downward correction in the short term. Meanwhile, the core inflation trend is expected to improve gradually. Yet, the developments in the 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.
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.”