Surprise Turkish Rate Cut Part of a Plan to Curb Lira Strength

January 20, 2011

The one-week repo rate of the Central Bank of the Republic of Turkey has been reduced another 25 basis points to 6.25%.  Such was cut 50 basis points in the middle of last month, its first change since July 2009.  Rates were slashed by 1025 basis points over the first seven months of 2009.

Monetary officials in a new statement portray today’s step as a shifting policy mix and insist that all recent moves including a tightening of reserve requirements to 8.0% from 5.5% prior to mid-November and a widening of the spread between the overnight borrowing and lending rates to 750 basis points constitute a more restrictive stance.  Officials were no doubt encouraged to lower their key repo rate further by a drop in CPI inflation to 6.4% in December from 9.2% in September and a likely further sharp deceleration in January to less than 5.5%.  End-2011 inflation is targeted at 5.0%, a goal officials expect to meet.  Officials want to reduce Turkey’s current account deficit and to slow the rate of domestic credit expansion.  Double-digit unemployment is another problem, which they’d like to lessen.  The belief is that a different mix of monetary policy tools will promote these objectives.  The statement predicts more reserve requirement increases in the future.  Despite strong domestic demand, capacity usage remains below pre-recession levels, and signs exist of lessening expected inflation.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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