A Somewhat Peculiar Statement from the Central Bank of the Republic of Turkey

August 27, 2014

The monetary policy committee left its one-week repo rate and overnight borrowing rate unchanged at 8.25% and 7.5%, respectively, but surprised analysts with a 75-basis point cut of the overnight lending rate to 11.25%.  That rate hadn’t changed since a 425-basis point hike to 12.0% on January 29.  At that same time, the repo rate was lifted by 550 bps to 10%, and the overnight borrowing rate was raised 450 bps from 3.5% to 8%.  January’s rate increases were a response to accelerating inflation caused in part by lira depreciation.

In the meantime, monetary authorities have been pressured by the government to relax its stance.  The repo rate was cut by 50 bps in May, 75 bps in June and 50 bps in July, and the overnight borrowing rate was reduced 50 bps in July as well.

A statement from the central bank released today called policy “tight” even though inflation of 9.3% as of July was higher than the repo rate and above June’s 9.2%.  The statement promises to keep the yield curve flat until “there is a significant improvement in the inflation outlook,” which presumably would entail a decline in both actual inflation and inflation expectations.

The timing of a cut in any of its rates is odd given that inflation rose in the latest reported month.  The statement blames this on food prices.  The decision to reduce the overnight lending rate by 75 basis points was that doing so achieved a more symmetrical interest rate corridor, and yet the overnight-borrowing rate midpoint of 9.375% still remains 112.5 basis points above the 8.25% repo rate.  Although more symmetrical than before, the rate corridor is still substantially asymmetric.

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



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