Turkish Monetary Policy Unchanged

June 17, 2010

The one-week repo rate of the Central Bank of the Republic of Turkey was held at 7.0% as expected, and a statement from the monetary authorities had a somewhat dovish tone.  It reiterates that present policy may be retained “for some time” and low rates could be maintained “for a long period of time.”  Until May, the key rate had been the overnight borrowing rate, which then, like now, is at 6.5%.  The shift of target rates doesn’t affect the timing of Turkey’s first tightening but may give officials greater flexibility down the road.  The statement observes an “ongoing” recovery and, as before, plays down the significance of a rise in total inflation earlier this year.   Externally generated uncertainties have become more significant, too, and while job growth has improved, unemployment exceeds 10%.

During the world and domestic recession, the overnight borrowing rate was slashed by 1025 basis points from 16.75% prior to November 2008 to 6.5% reached in November 2008.  After two cuts totaling 175 basis points in 4Q08, officials implemented 450 bps of reductions in 1Q09, 175 bps of cuts in 2Q09, 150 bps in 3Q09 and two final reductions of 50 bps last October and 25 bps in November. 

Total Turkish CPI inflation of 9.1% in May was the lowest since January and down from 10.2% in April.  At end-2001, inflation had been at 68.5%.  Moreover, core CPI is expected to be in the vicinity of the 6.5% target by the end of this year.  Capacity usage is below pre-crisis levels.  The price spike was caused by special and temporary factors, and officials in fact foresee a more favorable inflation prognosis now than when the last comprehensive review was made in April. 

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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