Central Bank of the Republic of Turkey: Different Measures for Different Needs

May 16, 2013

Amid slack economic growth and inasmuch as CPI inflation had declined to 6.1% in April from 7.3% in March and 7.0% in February, Turkish monetary officials reduced the one-week repo rate to 4.5% from 5.0%, which matches the cut in April and exceeds the 25-bp move that analysts were anticipating.  Because officials also fear that a pick-up in growth could lead to a destabilizing inflow of foreign capital, a partly offsetting rise of 50 basis points in the reserve requirement that applies to foreign currency deposits with maturities of less than a year and greater than three years.  These now become 13% and 11%.

In order to balance the risks on financial stability, the proper policy would be to keep interest rates low while increasing foreign currency reserves via macro-prudential measures. Accordingly, it was deemed appropriate to implement a measured tightening via reserve requirements and reserve options coefficients, while delivering a cut in the short term interest rates.

The overnight lending and borrowing rates also were lowered by 50 basis points to 6.5% and 3.5% respectively.  The lending rate was 9.0% at end-2012 and at 12.5% at end-2011.  The borrowing rate was at 5.0% from August 2011 until end-2012.  The one-week repo rate was cut by 50 bps in August 2011 and by 25 bps in December 2012 as well as by the aforementioned 50 bps at the previous policy meeting in April of this year.  Lifting reserve requirements on foreign currency deposits will hopefully not only limit capital inflows but also in doing so temper upward pressure on Turkey’s currency.  The authorities in developing economies have been even more vigilant than in the industrial ones about managing their currencies to ensure adequate export competitiveness.

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

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