Turkish Central Bank Tweaks Stance for First Time since October

February 21, 2012

The main monetary policy rate, the one-week repo, was left at 5.75%, its level since a 50-basis point cut last August.  The overnight borrowing rate of 5.0% since a 350-bp hike after the August meeting also was not changed.  However, the overnight lending rate was cut to 11.5% from 12.5%, thus narrowing the spread against the borrowing rate to 650 bps from 750 bps.  The previous changes in the overnight lending rate were increases of 25 bps in December 2010 and 350 bps in October 2011.  By manipulating the differential between the two overnight rates, policy is fine tuned.  But the benchmark for policy purposes is signaled by the one-week repo rate.  At 5.75%, such is at a record low.  The benchmark fell by 1175 basis points in the year to November 2009 and was thereafter cut three times by 50 bps each in December 2010, January 2011, and August 2011.

A statement on the web site of the Central Bank of the Republic of Turkey describes a balancing act between priorities.  Inflation of 10.61% in the year to January was up from 10.4% in December and 9.5% and twice as high as this year’s target of 5.0%.  The good news from officials is their expectations that January represents the peak.  Also, a desired shift from growth driven by domestic demand to externally supported activity is indeed occurring, heralding a healthier current account.  In justifying the modest policy tweak toward less restraint, note is also made that central bank rates remain low in other economies.  But the need is also underscored that any easing must be done cautiously to ensure that expected inflation remains consistent with the central bank’s target.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



One Response to “Turkish Central Bank Tweaks Stance for First Time since October”

  1. It’s the typical story for emerging market central banks – balancing the desire to ease policy settings to preempt the fallout from the Euro-crisis and slower global growth against the latent inflationary forces which seem to be persistent. Measured or cautious easing is the name of the game for now…