Central Bank of the Republic of Turkey Cuts Main Interest Rate to 7.75% from 8.25%

January 20, 2015

Monetary officials were not expected to extended monetary easing, which had been paused since August, quite this soon, and the overnight borrowing and lending rates of 7.5% and 11.25% were not also adjusted at this time.  A released statement expresses more optimism about CPI inflation, which fell to 8.17% last month from nearly 9%, noting that core inflation and expected inflation have declined as well as has total inflation, which officials believe will be nearing the 6% objective by the middle of this year.

The Committee anticipates that inflation will decline to levels close to the target by mid-2015. Yet, a more persistent reduction in inflation necessitates a cautious approach in monetary policy. In this context, future monetary policy decisions will be conditional on the improvements in the inflation outlook. Inflation expectations, pricing behavior and other factors that affect inflation will be closely monitored and the tight monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook.

Nevertheless, given the rather sizable remaining excess of inflation relative to target, analysts were surprised by today‚Äôs move and suspect that pressure from the government may have lent a sense of urgency to monetary officials that would not have otherwise been present.  From May to August of last year, the key one-week repo rate was reduced by 175 basis points, and the overnight borrowing and lending rates were cut 50 and 75 bps.  But after those reductions, monetary officials had said that resumed easing would have to await signs that a significant lowering of inflation had been secured.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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