Turkey narrows interest rate corridor and may cut further

    Turkey's central bank held its benchmark one-week repo rate unchanged at 5.75 percent but again trimmed its overnight lending rate, this time by 50 basis points to 9.5 percent, and said it may narrow the interest rate corridor further if needed.
    The Central Bank of the Republic of Turkey said narrowing the interest rate corridor would help support financial stability due to ongoing uncertainty about the global economy. But inflation remains above target so the bank will continue to take a cautious monetary policy stance.
    The central bank said domestic demand remains moderate while exports continued to increase despite the weakening global outlook.
    "Overall, aggregate demand conditions support disinflation and the current account deficit continues to decline gradually," the central bank said in a statement following a meeting of its Monetary Policy Committee.
    The central bank also cut its late liquidity window lending rate by 50 basis points to 12.5 percent but left the borrowing rate unchanged at 0 percent.
    While the bank left the lower level of the interest rate corridor unchanged at 5 percent, it also cut the repo rate on borrowing for primary dealers by 50 basis points to 9.0 percent.

    While the central bank has kept its benchmark repo rate unchanged since August last year, it has been gradually trimming the upper level of its interest rate corridor, which was introduced last year.
    Interest rates vary daily within the corridor, giving the central bank flexibility and it has used the corridor to gradually become more accommodative.
    The central bank noted that risk appetite in financial had improved and it would continue to monitor demand and inflation expectations and adjust funding amounts as needed.
    The bank said to support financial stability it would also adjust its reserve option coefficients - a policy tool introduced in August - and its interest rate corridor.
    "If deemed necessary, a measured step in the same direction may be taken in the forthcoming period," the bank said.
    In September the central bank cut the ceiling on its interest rate corridor by 150 basis points and also signaled that it may make further cuts.
    Turkey's inflation rate rose to an annual rate of 9.2 percent in September, up from 8.9 percent in August, but the bank it expects the fall in inflation to become more evident in the fourth quarter.
    However, "inflation will stay above target for some time due to recent increases in administered and energy prices," the bank said. The bank targets inflation of 5 percent.
    Despite the weak global economy, Turkey's economy has shown considerable resilience, growing by 8.5 percent in 2011 and by an annual rate of 3.2 percent in the second quarter, up from 2.3 percent in the first quarter.
    But the central bank governor recently said he expected the economy to grow between 3 and 4 percent this year and 4 to 5 percent in 2013.
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