Turkish Central Bank cuts main interest rate further by 25bp

By bne IntelliNews February 24, 2015

The Central Bank of Turkey lowered its main interest rate (one-week repo) by 25bp to 7.50% on February 24, in parallel with the expectations, which came on top of a 50bp cut in the previous monetary policy committee (MPC) meeting held on January 20. The market was also expecting a moderate rate cut between 25bp and 50bp.

The MPC said that the elevated volatility in food and energy prices was taken into account while giving the rate cut decision at a measured scale. The Central Bank has been under pressure from President Recep Tayyip Erdogan to bring interest rates down more aggressively to stimulate growth before the June general elections. Erdogan also argues that higher interest rates cause higher inflation. Some ministers from the cabinet, especially economy minister Nihat Zeybekci, also very often criticize the Central Bank for not cutting interest rates to boost growth. When the President sharpens his criticism, Deputy PM Ali Babacan, the economy’s czar, and Finance Minister Mehmet Simsek sometimes come out to defend the Central Bank to dispel investors’ concerns over the Bank’s independence.

On February 24, Finance Minister Simsek voiced again support for the Central Bank before the MPC announced its decision on the policy rates. Simsek told Reuters in New Delhi that Turkish Central Bank is independent and capable to give the right decisions. “We care about its credibility, therefore we believe that they would do what is right”, Simsek said. Simsek also commented that CPI inflation may easily decline to 5%-6% this year and the growth may easily come around 4%. The government believes in its strength in terms of public finance, according to Simsek.

On February 24 again, PM Ahmet Davutoglu said in Budapest after the MPC announced its moderate rate cut decision that the declining trend in policy rates is positive, however, he reiterated that the government demands acceleration when it takes into account declining commodity prices, political stability and macro parameters, and the declining trend in the inflation.

The Central Bank also cut its overnight lending rate from 11.25% to 10.75% and overnight borrowing rate from 7.50% to 7.25%.

The ongoing cautious monetary policy along with prudent fiscal and macroprudential policies are having a favorable impact on inflation, especially inflation excluding energy and food (core inflation indicators), and inflation expectations, the Committee said, adding that it anticipates that the core inflation will continue to decline. A more persistent reduction in inflation necessitates a cautious approach in monetary policy, the Committee stated.

Here are the other highlights from the Central Bank’s January 20 statement:

*Loan growth continues at reasonable levels in response to the tight monetary policy stance and macroprudential measures

*The favourable developments in terms of trade and the moderate course of consumer loans will contribute to the improvement in the current account balance

*External demand remains weak, while domestic demand contributes to growth moderately

*The implementation of the announced structural reforms would contribute to the potential growth significantly

Policy Rate (%)
Date one-week repo
May-2010 7.00
Dec-2010 6.50
Jan-2011 6.25
Aug-2011 5.75
Dec-2012 5.50
Apr-2013 5.00
May-2013 4.50
Jan-2014 10.00
May-2014 9.50
Jun-14 8.75
Jul-14 8.25
Jan-15 7.75
Feb-15 7.50
Source: Central Bank

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