A Mixed Message from the Central Bank of the Republic of Turkey

February 19, 2013

Turkish monetary officials made a number of decisions. 

  1. A 5.5% one-week repo rate, which is the main Turkish policy reference rate, was retained.  A 25-basis point cut in December had been the first change since a 50-bp cut in August 2011.
  2. The overnight interest rate corridor was sliced by 25 basis points to a range of 4.5-8.5%.  A similar 25-bp cut was engineered in January.  In 2012, the overnight lending rate had bee reduced by 100 bps in February, 150 bps in September, and 50 bps in October and November.  The overnight borrowing rate had been 5.0% from August 2011 through to the cut announced last month.
  3. Reserve requirements were lifted by 40 basis points to 11.5%.

These disparate decisions, explained in today’s statement, reflect a number of policy goals.  Officials want to shrink Turkey’s current account deficit and to limit hot-money inflows that could make the Turkish lira more overvalued.  Hence the cut in overnight interest rates.  However, a 19% on-year rise in loans exceeds target, and inflation of 7.3% is at a three-month high.  Thus, liquidity is being drained via higher reserve requirements to neutralize the impact on monetary conditions of the lower overnight rates.  Finally, growth slowed to less than 3% in 2012, and the jobless rate of 9.4% continues to crest, so the overall policy stance, as reflected in the historically low 5.5% repo rate and which is well below inflation, continues to be accommodative.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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