No Turkish Rate Cut This Month But No Sign Either When Tightening Will Start

December 17, 2009

The Central Bank of the Republic of Turkey failed to cut its key rates for the first month since October 2008 and removed the “easing bias.”  However, a statement by officials emphasized that it would be necessary to keep policy rates low for a long period of time.”  The key borrowing and lending rates are at 6.5% and 9.0%.  No G-20 central bank reduced rates my steeply than Turkey’s.  After cutting the borrowing rate by 1025 basis points from a peak of 16.75%, Turkish monetary policy has arrived at the trough that will extend far into 2010.  Although industrial production in October was 6.5% greater than a year earlier, the statement predicts only a moderately paced recovery in a forecast still laden with residual uncertainty regarding aggregate demand.

Base effects, namely the sharp decline of energy prices a year ago, will cause the 5.5% inflation rate to possibly rise near term, but monetary officials are looking through that possibility and claim that low resource utilization will maintain low inflation in the medium term.  The extensive reduction of central bank rates — 50 bps in 11/08, 125 bps in 12/08, 200 bps in 01/09, 150 bps in 02/09, 100 bps in 03/09, 75 bps in 04/09, 50 bps in each of the six months from May through October and a final 25 bps in November — is starting to improve Turkey’s credit markets.  The Turkish lira has lost some earlier gains over the past month and may suffer further down the road from contagion pressures related to fiscal difficulties in Greece and other parts of Euroland’s southern tier.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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