Turkey holds rates, repeats inflation will determine moves

    Turkey's central bank left its key interest rates unchanged, as widely expected, and repeated its recent guidance that it will continue its cautious 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) said food and energy prices continued to have a favorable impact on inflation but changes in the exchange rate of the Turkish lira is still delaying any improvement in inflation.
    "This delay, combined with the uncertainty in global markets and volatility in energy and food prices, makes it necessary to maintain a cautious stance in monetary policy," the CBRT said.
    The central bank maintained its key repo rate at 7.50 percent. It has cut the rate by 75 basis points this year as it slowly unwinds a 550 point emergency rate hike in January 2014.
    Turkey's headline inflation rate eased to 7.2 percent in June from 8.09 percent in May while core inflation was steady at 7.9 percent. The CBRT targets inflation of 5.0 percent, plus/minus 1.5 percentage points.
    "Future monetary policy decisions will be conditional on the improvements in the inflation outlook," the central bank said, repeating its guidance.
Future monetary policy decisions will be conditional on the improvements in the inflation outlook.
    The lira has been depreciating since early 2014 but has stabilized since early June after national elections. On June 8 the lira hit a low of 2.75 to the U.S. dollar and was quoted at 2.73 today, up 0.7 percent this year.


    The Central Bank of the Republic of Turkey issued the following statement:
   

"Participating Committee Members

Erdem Başçı (Governor), Ahmet Faruk Aysan, Murat Çetinkaya, Turalay Kenç, Necati Şahin, Abdullah Yavaş, Mehmet Yörükoğlu. 

The Monetary Policy Committee (the Committee) has decided to keep the short term interest rates constant at the following levels:

a) Overnight Interest Rates: Marginal Funding Rate at 10.75 percent, the interest rate on borrowing facilities provided for primary dealers via repo transactions at 10.25 percent, and borrowing rate at 7.25 percent,

b) One-week repo rate at 7.5 percent,

c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate at 0 percent, and lending rate at 12.25 percent.

Loan growth continues at reasonable levels in response to the tight monetary policy stance and macroprudential measures. The favorable developments in the terms of trade and the moderate course of consumer loans contribute to the improvement in the current account balance. External demand remains weak, while domestic demand contributes to growth moderately. The Committee assesses that the implementation of the announced structural reforms would contribute to the potential growth significantly.

Food and energy price developments affect inflation favorably in the short run, while exchange rate movements delay the improvement in the core indicators. This delay, combined with the uncertainty in global markets and volatility in energy and food prices, makes it necessary to maintain the cautious stance in monetary policy. The Committee has therefore decided to keep the interest rates at current levels.

Future monetary policy decisions will be conditional on the improvements in the inflation outlook. Inflation expectations, pricing behavior and other factors that affect inflation will be monitored closely and the cautious monetary policy stance will be maintained, by keeping a flat yield curve, until there is a significant improvement in the inflation outlook.

It should be emphasized that any new data or information may lead the Committee to revise its stance.

The summary of the Monetary Policy Committee Meeting will be released within five working days."

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