Lessening Urgency to Tighten Turkish Interest Rates

July 15, 2010

A new statement from the Central Bank of the Republic of Turkey kept the mantra that current policy interest rate levels can be maintained for “some time” and that low levels are probable for “a long time.”  The new benchmark one-week repo rate thus stays at 7.0%, and the old target instrument, the overnight borrowing rate, remains at 6.5%, 1025 basis points below its pre-November 2008 peak of 16.75%.  That rate had been cut by1 75 bps in 4Q08, 450 bps in 1Q09, 175 bps in 2Q09, 150 bps in 3Q09 and 75 bps in the final quarter of last year.

If anything, the statement sounds more confident about its rate guidance because 1) inflation has retreated to 8.4% as of June from 10.2% in April when the last inflation outlook was produced, 2) external demand seems more likely to slow than before because of coming fiscal restraint in Europe, 3) measures of expected inflation point to a further drop in actual inflation, and 4) capacity usage is still lower than before the recession.  Turkish GDP, which fell 14.5% in the year to 1Q09, rose 11.7% in the year to 1Q10.

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



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