Central Bank of the Republic of Turkey: Mixed Message

April 24, 2014

The latest policy statement from Turkish monetary officials struck a balance between guarding the lira against selling pressure and deferring to government pressure to ease.  In order to protect the exchange rate and blunt the impact of depreciation on actual and expected inflation, the one-week repo rate had been lifted from 4.5% to 10.0% in January.  That rate remains at 10%, as do the levels of the overnight lending rate (12%) and overnight borrowing rate (8%).  However,

Recent decline in uncertainties and partial improvement in the risk premium indicators have reduced the need for an additional tightening in liquidity policy. Accordingly, the Committee decided to deliver a technical cut [to 13.5% from 15.0%] in the late liquidity window lending interest rate.

The data regarding the first quarter of 2014 indicate some deceleration in private final domestic demand. Meanwhile, with the help of the recovery in foreign demand, the contribution of net exports to economic growth is expected to increase. The Committee expects that such a demand composition will support disinflation and lead to a significant improvement in the current account deficit in 2014.

It remains to be seen if this strategy works.  There is a risk instead that selling pressure will re-intensify on the lira.

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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