Central Reserve Bank of the Republic of Turkey Eases Only Slightly

February 24, 2015

Cuts today in Turkey’s one-week repo rate, overnight lending rate, and overnight borrowing rate were anticipated but are too small to assuage the frustration of a government that faces parliamentary elections in June, prefers rates to be considerably lower especially since Turkish inflation has fallen to a 20-month low of 7.24%, and has increasingly gone public in criticizing monetary policy.  Thirteen months ago at an emergency meeting to halt a plunging lira, central bank officials raised the repo rate by 550 basis points to 10.0%, the overnight lending rate by 425 bps to 12.0%, and the overnight borrowing rate by 450 basis points to 8.0%.  Today’s cut of 25 basis points in the repo rate to 7.50% follows four cuts totaling 225 bps made in May, June, July 2014 and one of 50 bps last month but leaves the level still three percentage points higher than at end-2013.  The overnight borrowing rate was reduced just once before by 50 bps last July and now becomes 7.25%, which compares to 3.5% at the start of 2014.  The overnight lending rate also underwent just one cut in 2014, a reduction of 75 bps made in August, and with today’s cut of 50 bps to 10.75%, it still lies three percentage points above its 2014 starting point.

Central bank officials released a statement defending their “measured” climb down in interest rates.

The Committee anticipates that core inflation will continue to decline. Yet, a more persistent reduction in inflation necessitates a cautious approach in monetary policy. Taking into account the elevated volatility in food and energy prices, the Committee decided to cut the interest rates at a measured scale.

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 monitored closely and the cautious monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook.

Turkey’s current account deficit exceeds 5% of GDP, and the government politically has become increasingly hostile to Western Europe on issues concerning the Middle East.  Both of these factors make Turkey susceptible to currency selling pressure that could be directed against emerging markets as the Federal Reserve transitions toward interest rate normalization.

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

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