Turkish Central Bank maintains key interest rate, but narrows rate corridor

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The Turkish Central Bank has kept its main policy interest rate the same, but trimmed its interest rate corridor’s upper band by 0.75 points, triggering a boost to the Turkish Lira.

In its first meeting after Recep Tayyip Erdoğan’s presidency win, the Monetary Policy Board shaved the overnight lending rate, which sets the upper band of the interest rate corridor, from 12 percent to 11.25 percent.

However, the main policy rate, the overnight borrowing rate, was kept at 8.25 percent, in line with expectations.

The majority of economists and business representatives have been saying high inflation undermines the case for rate cuts.

The bank also did not change the overnight borrowing rate, preserving the lower band of the corridor at 7.5 percent.

Gloomy inflation outlook

The markets welcomed the rate decision as lira-to-dollar ratio fell to 2.1525 liras per dollar after the Central Bank’s announcement, reaching its lowest level in two weeks.

The bank was expected not to make further reductions at this month’s meeting, as inflation in the country, the main driver of the bank’s monetary policies, has been higher than the bank’s year-end forecasts.

Earlier this month, the central bank said the inflation forecasts from its monthly survey had risen to 8.7 percent at the end of the year from 8.3 percent previously, despite its aggressive rate hike in January.

“The adverse impact of exchange rate developments since mid-2013 on annual inflation is gradually tapering off,” the Bank said in the statement released to announce meeting decisions.

“However, elevated food prices continue to delay the improvement in the inflation outlook. In this respect, the Committee also evaluated the possible impact of the drought and the geopolitical risks on the inflation outlook,” it further said.

The board also noted that monetary policies and limitatations introduced on loans and credit card spending has been effective to pressure excessive loan growth.

The Bank has trimmed its main interest rate by 175 base points since May, despite stubborn inflation. So far, it has resisted even larger cuts called for by Erdoğan as he geared up for the Aug. 10 presidential election.

Erdoğan, wedded to the idea that high rates in fact cause inflation, has repeatedly urged the Central Bank to make bigger rate cuts, after an emerging market sell-off in January forced it to almost double rates at a midnight meeting.

“The market was not expecting any change. A cut to the upper band can be perceived as a move to please the economy management,” Istanbul-based Global Securities said in a note to clients after the decision was announced.

Economy Minister Nihat Zeybekci told Reuters a day after Erdoğan’s victory that the government would continue to seek lower rates, adding that the central bank’s mandate should include employment and growth as well as price stability.

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