Turkish Interest Rates Left Unchanged as Expected

June 23, 2011

Turkey’s unorthodox monetary experiment continues.  The strategy implemented in late 2010/early 2011 combines low interest rates with a wider corridor between borrowing and lending rates, and higher reserve ratios and is intended to prevent second-order inflation from elevated commodity prices while also dissuading short-term capital inflows and dampening upward pressure on the lira that undermines the goal of rotating growth from domestic demand to net exports.  This was the fifth monthly meeting in a row to leave the key policy rate, the one-week repo, unchanged at 6.25%.  It was cut in January by 25 basis points and in December 2010 by 50 basis points.  Meanwhile the overnight borrowing rate was slashed from 5.75% prior to November to 1.5% now, and the overnight lending rate was lifted to 9.0% from 8.75%.  Reserve requirements were tightened sharply in December 2010 and March 2011, draining around 19 billion Turkish lire.  The net effect of all those changes was to make monetary conditions more restrictive.  Previously in the year between November 2008 and November 2009, the key interest rate was cut by 1175 basis points.

A statement posted today on the web site of the Central Bank of the Republic of Turkey states that economic trends have been recently consistent with what officials had assumed.  There is no reason to modify policy, and officials will continue to monitor the impact of the various policy changes implemented a few months ago.  Food inflation is expected to slow and the current account to improve.  The global situation is fraught with uncertainty, and Turkish domestic demand is expected to cool.  Private analysts are projecting that Turkish GDP growth and CPI inflation will each have a five-handle in 2011.

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



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