The move by the Central Bank of the Republic of Turkey continues last year's policy of adjusting its interest rate corridor, which it can vary daily to control exchange rates and capital flows.
The overnight lending rate, which forms the ceiling of the corridor, was cut to 8.75 percent from 9.0 and the borrowing rate, which forms the bottom, was cut to 4.75 percent from 5.0 percent.
The bank also raised its reserve requirements for deposits of varying maturities. The requirement on foreign exchange deposits of up to one year, for example, was raised by 50 basis points to 12.0 percent while the requirement for one-year lira deposits was raised by 25 basis points to 6.25 percent.
Last year the central bank kept the benchmark repo rate steady until the last meeting of the year in December, when it cut it by 25 basis points, the first change in the repo rate since August 2011.
A drop in inflation paved the way for the central bank to trim its overnight rates with inflation hitting a year low of 6.16 percent in December, evidence that inflation is trending downward, the central bank said. At the end of 2011, inflation hit 10.45 percent.
However, the central bank has said that it expects inflation to remain above its 5.0 percent target for some time due to higher administered prices.
Turkey's Gross Domestic Product expanded by only 0.2 percent in the third quarter from the second for annual growth of 1.6 percent, the lowest quarterly growth rate since third quarter 2009.
For 2013 the central bank is expecting growth of 4 percent or above.
www.CentralBankNews.info
The Turkish economy recorded spectacular expansion in 2010 and 2011, with 8.9 and 8.5 percent growth, to rank among the world's fastest-growing economies.
But its expansion started slowing down in late 2011, with a growth rate of 5.2 percent -- which was painted as a healthy easing of business activity.
The Turkish economy posted markedly slower growth of 1.6 percent in the third quarter of 2012 from the same period a year earlier, official statistics revealed early this month.
The third quarter official result pulled down nine-month growth in Turkish gross domestic product to 2.6 percent, which was well below the official forecast of 3.2 percent.
Government forecasts expect 4 percent yearly growth in 2013 and 5 percent each in 2014 and 2015.
But its expansion started slowing down in late 2011, with a growth rate of 5.2 percent -- which was painted as a healthy easing of business activity.
The Turkish economy posted markedly slower growth of 1.6 percent in the third quarter of 2012 from the same period a year earlier, official statistics revealed early this month.
The third quarter official result pulled down nine-month growth in Turkish gross domestic product to 2.6 percent, which was well below the official forecast of 3.2 percent.
Government forecasts expect 4 percent yearly growth in 2013 and 5 percent each in 2014 and 2015.
IMF Says Turkey’s Central Bank Should Focus on Inflation Control
The Turkish central bank should be more focused on meeting its inflation target because its multiple monetary policy tools are “blurring signals,” the International Monetary Fund staff said.
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While the monetary policy framework put into place by Central Bank Governor Erdem Basci aims to achieve both price and financial stability, inflation has remained “well above target,” IMF economists said in an annual assessment of the country’s economic policy dated Oct. 31 and released yesterday. It recommended a return to “a more conventional framework.”
“The new framework, relying on a battery of novel instruments to gain degrees of freedom in segmenting domestic and international interest rates, has not yet proved its superiority,” the IMF wrote.
Monetary policy in Turkey has been led in a way the IMF said in the report is “unconventional,” relying on a variety of instruments instead of one interest rate in an attempt to stem capital inflows. The bank forecast Oct. 24 that inflation will reach 7.4 percent by the end of the year. Its target is 5 percent.
“It is the ability to achieve the inflation target and anchor expectations that ultimately determines the success of monetary policy, and so far inflation has remained well above the target,” the report said. “While the new instruments may each seem appealing, as a whole, they are blurring policy signals and may be weakening the monetary transmission mechanism.”
Turkey Yields Jump Most in 3 Months on Interest-Rate Corridor
Turkey’s bond yields jumped the most in more than three months after the central bank left its overnight borrowing rate unchanged, signaling a less dovish monetary policy than investors’ expected.
Yields on two-year benchmark debt rose 10 basis points, or 0.1 percentage point, to 5.91 percent, the biggest advance since Sept. 3, by the 5:00 p.m. close in Istanbul, paring this year’s gain to 510 basis points. The lira weakened 0.2 percent against the dollar at 1.7814, reducing its gain this year to 6.1 percent, the third-largest among 10 emerging markets in Europe, the Middle East and Africa.
The central bank, led by Governor Erdem Basci, kept the bottom end of its so-called rates corridor unchanged at 5 percent yesterday. The median estimate of seven economists surveyed by Bloomberg was for a 25 basis-point cut. Basci maintained the overnight lending rate at 9 percent and lowered the one-week repurchase rate by 25 basis points to 5.5 percent, in line with estimates.
“‘The central bank was not as dovish as expected at yesterday’s Monetary Policy Committee meeting,” Cengiz Erguen, a director of local markets trading at Commerzbank AG, said in e-mailed comments from London. “The 25 basis-point cut at the benchmark rate was very cautious and everyone had been betting on a 25 basis cut at the lower end of the band and people got slightly nervous when this did not come.”
Economic Growth
Turkey’s economic growth fell to 1.6 percent in the third quarter, the slowest pace since the 2009 recession.
Credit growth showed “a marked increase” and the contribution of domestic demand to economic growth “is expected to increase in the forthcoming period,” the bank said yesterday.
“The market saw the text from the central bank as very hawkish,” said Sercan Kiliclar, a fixed-income trader at Akbank TAS (AKBNK) in Istanbul, said in e-mailed comments. “There will be no interest-rate reductions driven by economic growth.”
Turkey’s economic growth may slow to 3 percent this year from 8.5 percent in 2011, according to the median estimate of 24 analysts on Bloomberg.
Basci introduced the rates band in October of last year that allows him to adjust interest rates on a daily basis. It was created to balance above-target inflation, slowing economic growth and high volatility of the lira.
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