Turkey's central bank maintained its benchmark repo rate at 8.25 percent, as expected, but continued to nudge down its overnight interest rate corridor and repeated its guidance from July that it would maintain a tight monetary policy stance by "keeping a flat yield curve until there is a significant improvement in the inflation outlook."
The Central Bank of the Republic of Turkey (CBRT) cut the overnight rate on marginal funding, the ceiling of its interest rate corridor, by 75 basis points to 11.25 percent but maintained the borrowing rate, or the floor in the corridor, at 7.5 percent.
The CBRT also cut the borrowing rate for primary dealers via repo transactions by 75 basis points to 10.75 percent and the lending rate at its late liquidity window by 75 basis points to 12.75 percent while it kept the borrowing rate at zero percent.
The Turkish central bank has been slowly rolling back its sharp rate hike in January in response to volatility from capital outflows and a plunge in the value of the lira currency. So far it has cut its benchmark repo rate by 175 basis points since May after raising it by 550 points on Jan. 28.
In January the CBRT also shifted its overnight rate corridor sharply upwards by raising the funding rate to 12.0 percent from 7.75 percent and the borrowing rate to 8.0 percent from 3.5 percent.
Last month the central bank cut the borrowing rate to the current 7.50 percent and with today's cut in the funding rate to 11.25 percent, the central bank continues to shift the rate corridor downwards.
The CBRT said the negative impact of exchange rate developments since mid-2013 year on inflation are gradually decreasing but high food prices continue to delay an improvement in the outlook for inflation.
"In this respect, the Committee also evaluated the possible impact of the drought and the geopolitical risks on the inflation outlook," the central bank said, adding that loan growth continues at reasonable levels in response to its tight policy stance and private demand is modest.
Turkey's headline inflation rate rose to 9.32 percent in July from 9.16 percent in June but still down from 9.66 percent in May, the high for this year.
Economists had expected to sticky inflation rate to limit the central bank's room to cut its benchmark rate in light of a decline in global risk appetite and signs that the United States remains on track to raise rates at some point in 2015.
The Turkish government, including Prime Minister Recep Tayyip Erdogan who won the election earlier this month and assumes office on Aug. 28, has kept up pressure on the central bank to lower rates further to boost economic growth. However, so far the bank's governor, Erdem Basci, has resisted the pressure, helping maintain the credibility of the central bank with global investors.
Basci has been under pressure ever since the sharp rate hikes in January, determined to bring inflation back to the bank's 5.0 percent target in 2015.
After plunging in January to a low of 2.34 to the U.S. dollar in late January from 2.15 at the start of the year, the lira rebounded in response to the central bank's rate hikes.
But this month it has drifted lower, along with bonds, reflecting some discomfort among investor over Erdogan's views of monetary policy and his plans to expand his role to one that combines head of state with the executive power of running the government.
But the lira gained in response to the bank's decision to maintain rates today. The lira was trading at 2.15 to the U.S dollar today, up from 2.16 yesterday.
Turkey's GDP expanded by 1.7 percent in the first quarter of this year from the previous quarter for annual growth of 4.3 percent, slightly down from 4.4 percent in the fourth quarter of 2013.
www.CentralBankNews.info
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