Turkish Monetary Policy Left Unchanged

May 25, 2011

Monetary authorities at the Central Bank of the Republic of Turkey decided as expected to continue their wait-and-see stance, observing the lagged impact of various policy changes late last year and in early 2011.  In May 2010, the one-week repo rate was adopted as the key operative central bank policy interest rate.  It has been at 6.25% since January following cuts that month of 25 basis points and 50 bps in December.  Separately, reserve requirements were raised sharply in a series of moves last autumn and this past March.  Such now range from 9% to 15% versus 5.5% before.  This combination of lower interest rates but reduced liquidity as a result of higher required reserves had a net restrictive effect.  A third change was to widen the corridor between the central bank’s overnight borrowing and lending rates.  These rates and their spread used to be the vehicle for administering monetary policy.  Between November 2008 and November 2009, the borrowing rate was cut by 1025 basis points to 6.5%, while the lending rate got slashed 1075 basis points to 9.0%.  Both rates were cut 25 bps in September 2010. In October 2010, the borrowing rate was reduced by another 50 bps, while the lending rate stayed at 8.75%.  In November, the borrowing rate was cut by 400 bps to 1.75%, and in December it was reduced to 1.5%, as the lending rate was lifted to 9.0%.  There have been no further changes since December in either of those rates, which are now 750 basis points apart.

The unorthodox combination in Turkey of lower interest rates, a wider interest rate corridor and much tighter reserve requirements are intended to promote both price stability and greater financial stability.  A new statement from the central bank today notes that elevated import prices are still exerting upward pressure on overall CPI inflation, which recorded on-year changes of 4.2% in February, 4.0% in March and 4.3% in April.  The statement warns that inflation in May might exceed the 5.5% target and observes that unemployment is approaching pre-crisis levels.  But growth in personal consumption and investment are moderating, and the outlook for export demand is weak.  Turkey still has an output gap, and officials are hoping that such will help to reduce inflation in due time.  The Monetary Policy Committee will continue to “monitor the tightening impact of the existing monetary policy mix” but stands ready to “take additional measures along the same lines if needed” in the future. This wait-and-see approach, the same stance taken at the prior meeting on April 21, was anticipated by analysts.  The next two policy decisions are due June 23 and July 21.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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