By CentralBankNews.info
Turkey’s central bank lived up to past promises and simplified its monetary policy framework, setting the one-week repurchase rate as its new policy rate and raising it by 8.50 percentage points to 16.50 percent, the current level of the late liquidity lending rate.
In a brief statement the Central Bank of the Republic of Turkey (CBRT) said the new operational framework would take effect on June 1, and the overnight borrowing and lending rate would be set 150 basis points below and above the one-week repo rate.
Several years ago Turkey’s central bank said it was planning to simplify the operational aspects of its monetary policy but this talk then quieted in 2016 following a failed coup attempt that July and then the election of Donal Trump as U.S. president, which dented Turkish asset prices.
Since then CBRT has used five different rates to control interest market rates and the attractiveness of Turkish assets, including the lira. This included the one-week repo rate, an overnight funding and borrowing rate, and a late liquidity borrowing and lending rate.
While the repo rate was last raised in November 2016 to 8.0 percent, CBRT has been tightening its monetary policy by other means, such as the rate it pays on local lenders’ U.S. dollar reserves and require reserve ratios, and raising the volume of foreign exchange deposits.
Since early 2017 the central bank has been using the late liquidity lending rate as its main tool to tighten its policy stance in response to high inflation from lira depreciation.
This year alone, the late liquidity rate – used by banks to access funds shortly before local markets’ close – has been raised 375 basis points, including last week’s 300 basis point hike to 16.50 percent. Since 2017 the late liquidity lending rate has been raised by 650 points.
Last week’s hike in the late liquidity rate came in response to a fresh bout of pressure on the lira from investors who are unnerved by President Tayyip Erdogan’s statements that he would exert greater control over the central bank if he win’s the presidential elections on June 24.
Erdogan has long been a vocal opponent of the central bank’s tight monetary policy, claiming high inflation is a result of its high interest rates, an argument that runs counter to economic theory and practice.
The lira reacted swiftly to the central bank’s simplification of its policy framework, jumping 3.0 percent to 4.56 to the U.S. dollar. But the lira still remains almost 17 percent below the level at the start of this year.
Turkey’s headline inflation rate rose to 10.85 percent in April from 10.23 percent in March while core inflation rose to 12.2 percent.
Last month the central bank raised its 2018 inflation forecast to 8.4 percent from 7.9 percent but retained its 2019 forecast of 6.5 percent and its medium-term outlook for inflation of 5 percent.
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