Turkish central bank: monetary policy to be simplified during global monetary policy normalisation

By bne IntelliNews August 25, 2015

Monetary policy framework may be simplified by gradually narrowing the interest rate corridor during global monetary policy normalization, eventually one week repo rate will assume the role of policy rate and represent the stance of monetary policy, said the central bank on August 25 in the minutes of the latest monetary policy committee (MPC) meeting.

At the MPC meeting on August 18, the central bank kept its main rates unchanged at their current levels despite the sharp depreciation of TRY due to political uncertainty and security concerns.

The benchmark rate (one-week repo) was kept at 7.5%, while the ON borrowing and ON lending rates were maintained at 7.25%, and 10.75, respectively.

Future monetary policy decisions will be conditional on the improvements in the inflation outlook, reiterated the bank in the minutes, adding that inflation expectations, pricing behaviour and other factors that affect inflation will be monitored closely and the cautious monetary policy stance will be maintained, until there is a significant improvement in the inflation outlook.

Although processed food and energy price developments affect inflation favourably in the short run, the cumulative exchange rate movements since early 2015 delay the recovery in the core inflation trend, warned the bank. Against this backdrop, a slightly tighter monetary policy stance might be necessary to counterbalance the upside risks to inflation, it said.

Here are the other highlights from the minutes of the MPC meeting.

*Overall, the pace and the composition of loans limit medium-term inflationary pressures and contribute to the improvement in the current account balance.

* In the second quarter, external demand remained weak while domestic demand contributed to growth moderately. Current indicators suggest a similar outlook for the July-August period.

*Yet, uncertainties in global markets and the weak course of consumer and investor confidence add to the downside risks to growth for the upcoming period.

* Although the recovery in the European economy affects the external demand positively, ongoing geopolitical developments and the slowdown in global trade restrict the export growth.

* Recently, rising risk premiums due to global and domestic uncertainty have led to a tightening in financial conditions. This, coupled with the already weak confidence indices, creates downside risks regarding the domestic demand for the second half of the year.

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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