First Cut of Turkey’s One-Week Repo Rate since August 2011

December 18, 2012

Turkey monetary officials continue to face conflicting imperatives.  Growth last quarter (up just 1.6% from 3Q11) was its weakest since 2009, and CPI inflation has dipped under 6.5%.  However, a current account deficit is shrinking only gradually and at some 6.5% of GDP remains greater than desired.  An assortment of tools are employed to balance the various objectives of stimulating growth, keeping inflation contained, ensuring ample liquidity, and rebalancing export and domestic demand so as to keep the external deficit on a shrinking trend.  Earlier this year, the overnight lending rate was cut from a starting level of 12.5% by 100 bps in February, 150 bps in September, 50 bps in October and 50 bps to 9.0% in November, which is the lowest level since a 350-bp increase in October 2011.  By keeping the overnight borrowing rate at 5.0% since August 2011, the lending rate reductions were squeezing the lending-borrowing rate corridor and gradually addressing the downtrends in growth and, more recently, inflation.  Over the last 16 months, however, officials didn’t cut their main policy-signaling one-week repo rate.  Until today, there was too much concern that being more aggressive in promoting growth could lead to failure in the containment of inflation.  Interestingly, today’s cut of the repo rate to 5.5% was not accompanied by further cuts in the overnight rates or by a narrowing of the overnight rate band through a change in the lending rate but not the borrowing rate. 

A suggestion in the banks statement was left that those rates and the reserve ratio requirement could be eased down the road.  “The Committee has indicated that, in order to support financial stability, it would be appropriate to take additional steps using reserve requirements, while delivering a limited cut in the policy rate. In the following period, if deemed necessary for financial stability, a measured adjustment in the interest rate corridor might also be considered.”

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



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