Turkish Central Bank 7.0% One-Week Repo Rate Retained as Forecast

October 14, 2010

The interest rate structure at the Central Bank of the Republic of Turkey was reached in November 2009 after 1025 basis points of cuts during the preceding year.  Officials today decided not to raise the 7.0% 1-week repo rate or any of the other key rates it uses.  The decision was as expected and explained in a statement posted on the bank’s web site.  Like officials in other emerging markets, monetary authorities in Turkey are concerned about the effects of heavy capital inflows.  Although proceeding with an exit strategy on emergency funding — for example, three-month repos are being discontinued — they are unwilling to embark on a more conventional tightening of credit policy.  A 7% seven-day repo rate is being maintained despite a rise of CPI inflation from 7.6% in July to 8.3% in August and 9.2% in September.  With considerable excess capacity including a 10.5% jobless rate, inflation is expected to settle back, and core inflation is projected to stay consistent with the bank’s medium-term targets. 

The sentence devoted to future rate guidance reads, “In light of these assessments, the Committee has reiterated that it would be necessary to maintain policy rates at current levels for some time, and to keep them at low levels for a long period. On the other hand, in order to enhance the efficient functioning of the Turkish lira market, the Committee has decided to reduce the borrowing rates by 50 basis points.”  In May of this year, officials made a technically inspired switch of their benchmark interest rate from the overnight borrowing rate of 6.5% at that time to the 7.0% one-week repo rate.  A month ago, the borrowing rate was sliced to 6.25%, and the 9.0% overnight lending rate was also cut by 25 basis points to 8.75%, and those adjustments were likewise called “technical.”  This month, the borrowing rate has been cut further to 5.75%, 11 percentage points less than its peak level prior to November 2008.  Officials also ended three-month liquidity RP tenders as a further step in their “exit strategy.” 

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



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