In a surprise move, the Central Bank of Turkey has cut the one-week repo rate to 9.5% from 10% while keeping the overnight borrowing and lending rates on hold at 12% and 8%, respectively. Most analysts had expected the Bank to keep its main rate unchanged at 10%. The surprise move came weeks after PM Recep Tayyip Erdogan called for a rate cut despite stubbornly high inflation. Erdogan, expected to compete in the presidential race in August and now struggling with the country’s deadliest industrial accident ever that killed 301 miners, does not want to see the economy slow down ahead of the polls.

With the recent decline in uncertainties and improvement in the risk premium indicators, market interest rates have fallen across all maturities and in this regard, the Monetary Police Committee (MPC) decided on a measured decrease in the one week funding rate, the Central Bank said in a statement released after the regular monthly MPC meeting on Thursday. The monetary policy stance will continue to be tight, the Bank said, adding that the tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook.

Recent data points to a modest course in private final domestic demand, and with the help of the recovery in foreign demand, the contribution of net exports to economic growth is expected to increase, the Bank stressed. Such a demand composition will support disinflation and will lead to a significant improvement in the current account deficit in 2014, the Bank added.