Turkey's central bank keeps policy rates on hold to no surprise

Turkey's central bank keeps policy rates on hold to no surprise
By bne IntelliNews July 27, 2017

Turkey’s central bank, which is battling double-digit inflation, on July 27 kept its one-week repo (8%), overnight lending (9.25%) and borrowing (7.25%) rates on hold as anticipated. The market was also not surprised by the national lender's decision to keep the late liquidity window-lending rate (12.25%) unchanged.

The central bank has over recent months tightened monetary liquidity via unorthodox measures, particularly by forcing Turkey’s banks to borrow through the late liquidity window facility. It has been using the unorthodox policy rates corridor approach to maintain flexibility between dealing with fluctuations in the lira and ongoing political pressure to cut rates.

Fifteen economists surveyed by Reuters in advance of the central bank’s monetary policy meeting expected the central bank to keep its policy rates unchanged.

Following the bank’s announcement on holding rates, the lira on July 27 lost 0.12% d/d to trade at 3.5419 per dollar while the benchmark BIST-100 index moved up 1.11% to 108,392.

Although recent improvements in cost factors and an expected partial correction in food prices will contribute to disinflation, current elevated levels of inflation pose risks to pricing behavior, the central bank’s Monetary Policy Committee (MPC) reiterated in a press release following its regular meeting held on July 27.

Turkey’s annual inflation rate fell to its lowest level in four months in June, easing pressure on the central bank to fight price growth. The rate retreated from 11.72% in May to 10.90% in June having hit 11.87% in April, the highest recorded level since October 2008.

Food inflation, which has the highest weighting - of 21.77% - in the inflation basket, slowed to 14.34% y/y in June from 16.91% in May.

As inflation and exchange rate-related risks nevertheless remain high, a direct increase in the policy rate is needed, the OECD said in its June Economic Outlook forecast. The OECD at the same time raised its 2017 CPI inflation forecast for Turkey to 10.4% from its previous forecast of 7.7%, published last November.

Faced with a sharp exchange rate depreciation and rising inflationary expectations, the monetary stance has been tightened, but explicit increases in the main policy rate are warranted, the OECD also warned.

In April, Turkey’s central bank revised up its end-year inflation expectation for 2017 to 8.5% from its previous forecast of 8%. The World Bank is forecasting a quickening of annual inflation to 9% at the end of 2017 from last year’s 8.5%.

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