Turkey holds rates, to tighten until inflation on target

    Turkey's central bank held its policy rates steady but said it would "maintain the cautious monetary policy stance and implement additional monetary tightening at the appropriate frequency until the medium term inflation outlook is in line with the medium term targets."
    The Central Bank of the Republic of Turkey (CBRT) has been tightening its policy since May when its lira currency started to weaken as the strong inflow of capital began to reverse as in some other major emerging markets, such as India, Brazil and Indonesia.
    But while its has kept its policy rate steady at 4.50 percent since May, it has raised the overnight lending rate, the ceiling in its interest rate corridor, most recently by 50 basis points in August to 7.75 percent prevent a decline in the currency from fueling inflation.
    "Inflation is expected to fall further in the forthcoming period," the central bank said, but added that "core inflation indicators are likely to hover above the inflation target for some time due to the exchange rate volatility observed during the recent months."
   Turkey's headline inflation rate eased to 8.17 percent in August from 8.88 percent in July and 8.3 percent in July, above the central bank's 5.0 percent target.

     While the lira currency fell sharply in May and then again in August, it has strengthened since Sept. 5. From early May through Sept. 5 the lira depreciated by 13.5 percent against the U.S. dollar, falling to 2.07 per dollar, but since then it has strengthened, trading at 2.0 today.
    Last week the central bank governor said in Geneva, Switzerland, that the lira exchange rate would be 1.92 to the dollar by the end of the year, defending his earlier prediction.
    The central bank said today that it would continue to adjust the composition of lira liquidity and that "in order to contain the repercussions of uncertainty in global monetary policies on the domestic economy, increasing the predictability of the Turkish lira liquidity policy is deemed important."
    Domestic demand and exports are continuing to grow at a moderate pace, the central bank said, adding that weak capital flows, the cautious monetary policy stance and other macroprudential measures should gradually bring down loan rates to "more reasonable levels."
    "Accordingly, a gradual decline in the current account deficit, excluding gold trade, is expected to continue," the central bank said.
    Turkey's Gross Domestic Product rose by 2.1. percent in the second quarter from the first quarter for annual growth of 4.4 percent, up from 2.9 percent in the first.
    The current account deficit rose to $5.786 billion in July from $4.626 billion in June but down from a recent high of $8.209 billion in April.

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