Status Quo Maintained in Turkish Monetary Policy

April 21, 2011

The Central Bank of the Republic of Turkey is engaged in an experiment of low interest rates, higher reserve requirements and a wide gap between its overnight borrowing rate of 1.5% and lending rate of 9.0%.  The main one-week repo rate was slashed by 1025 basis points between November 2008 and November 2009 and, more recently, cut further by 50 basis points in December 2010 and another 25 bps to 6.25% in January of this year.  Reserve requirements were raised at the late March policy meeting to a range of 9-15%, having been at 5.5% back in November.  Officials have claimed that the net effect of recent policy changes will be restrictive.  In addition to preventing second-round inflationary effects in response to higher commodity costs, the intent of Turkey’s unusual combination of policy changes is to help rebalance the strengths of exports and domestic demand.

No further changes were made after this month’s policy meeting, the first under a new Bank Governor.  A communique from officials promises to carefully watch the effects of recent actions, verifying that second-order effects are not happening, and to respond if they do.  The statement says that more moderate growth has occurred this year than seen in the final quarter of 2010 but adds that domestic demand demand remains strong and the jobless rate continues to run above its pre-crisis level.  CPI inflation of 4.0% in March after 4.2% in February is expected to accelerate and end 2011 above the 5.5% target level. That overshoot is not meant to be sustained.

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



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