Turkey’s central bank cut its main short-term interest rates by 50 basis points, saying that weak global demand and the outlook for commodity prices should “contain the upward pressures on inflation.”
The Central Bank of the Republic of Turkey (CBRT) cut its policy rate, the one-week repo rate, to 5.0 percent from 5.50 percent along with the top and bottom rates on its daily interest rate corridor.
The overnight borrowing rate in the corridor was cut by 50 basis points to 4.0 percent and the overnight lending rate to 7.0 percent.
The rate on borrowing facilities for primary dealers was also cut by 50 basis points to 6.5 percent.
The CBRT has been steadily narrowing its interest rate corridor since last September, including a 100 basis point cut in the ceiling rate last month. However, it only cut its main policy rate in December, seeking to balance the need to stimulate declining economic activity without boosting credit growth too much and encouraging the inflow of capital that looks to take advantage of the high yield.
The CBRT said capital inflows had re-accelerated and credit growth was above the bank’s reference rate so “in order to balance the risks to financial stability, the proper policy would be to keep interest rates low while increasing foreign currency reserves via macroprudential measures.”
In addition to cutting short-term rates, the bank will further raise its reserve options coefficients, a tool that helps the central bank control banks’ foreign exchange reserves and thus liquidity.
Turkey’s inflation rate rose to 7.29 percent in March, slightly up from 7.03 percent in February. The CBRT targets annual inflation of 5.0 percent this year, the same as in 2012 when inflation averaged 6.2 percent.
The central bank said demand was developing in line with expectations, with domestic demand healthy, but exports were lower. The current account deficit had increased in light of a revival in domestic demand but it expects to contain a further widening of the deficit.
Turkey’s Gross Domestic Product stagnated in the fourth quarter from the third quarter for annual growth of 1.4 percent, down from a 1.6 percent annual rate in the third quarter.
In the first four months of this year, the CRBR has cut the overnight lending rate by 200 basis points and the overnight borrowing rate by 100 basis points. The short-term rates have been declining during the last decade from 2002 when the borrowing rate was 57 percent and the lending rate 62 percent.
In 2012 the CBRT started cutting the overnight lending rate from 12.50 percent while keeping the borrowing rate steady at 5.0 percent.
Earlier this month, the central bank’s governor, Erdem Basci, held out the hope for “a measured rate cut, ” and a few day’s later Prime Minister Recep Erdogan said interest rates around 6 percent were too high in light of a decline in inflation to around 6 percent from 63 percent in 2002.
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