(Before It's News)
Turkey's central bank left its benchmark one-week repo rate steady at 7.50 percent but surprised financial markets by pausing in its policy of lowering the overnight funding rate, saying “recent developments in exchange rates and other cost factors restrain the improvement in the inflation outlook and thus necessitate the maintenance of a cautious monetary policy stance.”
The Central Bank of the Republic of Turkey (CBRT) has cut the overnight funding rate by 250 basis points to 8.25 percent since March, most recently last month, as part of a simplification of its monetary policy framework and efforts to stimulate demand and economic growth.
But the benchmark rate, the one-week repo rate, has been maintained since February 2015 as the central bank tries to push down inflation.
“The Committee stated that the direction and the timing of the next step in the monetary policy simplification process will be data dependent,” the central bank said, adding its usual guidance that it will maintain a cautious policy stance and the outlook for inflation will determine its decisions.
Turkey's headline inflation rate eased to 7.28 percent in September from 8.05 percent in August as food prices declined for the first on a monthly basis since 2003. The CBRT has forecast year-end inflation of 7.5 percent.
While the exchange rate of the lira has weakened this year – on Tuesday it hit a record low of 3.11 to the U.S. dollar – it rose in response to the central bank's decision today.
The lira was trading at 3.06 to the U.S. dollar shortly after news of the CBRT's decision to maintain rates, up from 3.07. But it is still down 4.6 percent compared with the the start of this year.
Turkey's economy decelerated in the third quarter, the CBRT said, noting the decline in tourism revenue and moderate consumer lending. But the central bank said it expected domestic demand to start to recover in the fourth quarter, helped by recent supportive measures and incentives.
Turkey's Gross Domestic Product grew by an annual rate of 3.1 percent in the second quarter, down from 4.7 percent in the first quarter.
The Central Bank of the Republic of Turkey issued the following statement:
“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 has been kept at 8.25 percent, and borrowing rate has been kept at 7.25 percent,
b) One-week repo rate has been kept at 7.5 percent,
c) Late Liquidity Window Interest Rates (between 4:00 p.m. – 5:00 p.m.): Borrowing rate has been kept at 0 percent, and lending rate has been kept at 9.75 percent.
Recently released data and indicators regarding the third quarter display a deceleration in the economic activity. Reduced tightness in monetary conditions and the recent macroprudential measures support the overall financial conditions. The lagged effects of the terms of trade developments and the moderate course of consumer loans limit the widening in the current account balance driven by the decline in tourism revenues. Demand from the European Union economies continues to contribute positively to exports. With the supportive measures and incentives provided recently, domestic demand is expected to recover starting from the final quarter. The Committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly.
The slowdown in aggregate demand contributes to the gradual fall in core inflation. Yet, the recent developments in exchange rates and other cost factors restrain the improvement in inflation outlook and thus necessitate the maintenance of a cautious monetary policy stance.
In light of these assessments, the Committee decided to keep the interest rates at current levels. The Committee stated that the direction and the timing of the next step in the monetary policy simplification process will be data dependent.
Future monetary policy decisions will be conditional on the inflation outlook. Taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the cautious monetary policy stance will be maintained.
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.”