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Turkish Central Bank Holds Key Interest Rates

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Monetary Policy Committee keeps 1-week repo rate at 7.5 percent and overnight borrowing rate at 10.75 percent.

The Central Bank of the Republic of Turkey on Wednesday held key interest rates at current levels, the bank said in a statement.

The one-week repo rate, which is the rate at which banks borrow from the central bank for one week terms, was kept at 7.5 percent.

 The overnight borrowing rate, which is the rate at which banks borrow from the central bank overnight, remained at 10.75 percent.

"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)," the statement said.

"This is about trying to stabilize the exchange rate and preventing too much pass through to inflation," commented Timothy Ash, an analyst with Standard Bank.

In fact, the bank said that it would continue its cautious policies. 

"Uncertainty in global markets and elevated food prices necessitates maintaining the cautious stance in monetary policy. Accordingly, the Committee decided to keep the interest rates at current levels," the statement said.

Future monetary policy decisions will be conditional on the improvements in the inflation outlook, the bank added.

The Turkish lira jumped to above 2.71 against the dollar after the announcement.

"This is a pretty dovish announcement, somewhat contrary to market expectations," Ziraat Securities economist Bora Tamer Yilmaz said. 

Analysts said the high rates were discouraging for growth in the Turkish economy.

"The effective rate, the rate which matters to banks, is the overnight rate, and this is still quite high," explained Attila Yesilada, an economist with Global Source Partners in Istanbul. "This means that the real rates that consumers see on their loans are between 15 percent and 17 percent. That makes consumer borrowing a challenge, limits consumer spending and has a direct effect on economic growth."

"At the same time, recovery is poor in Europe, and exports are down. All of this means that Turkey will probably just see 2.5 percent GDP growth at the end of the year," Yesilada added.

The central bank did reduce one important rate: Banks' one-week maturity borrowings from the central bank was reduced from 4.5 percent to 4 percent for the dollar and from 2.5 percent to 2 percent for the euro. 

"Banks providing more foreign exchange liquidity to the system should reduce some of the lira volatility we have been seeing in the last couple of weeks," said Ozlem Derici, chief economist of DenizInvest in Istanbul.

But the remuneration rate for the required reserves maintained in Turkish liras has been raised by 50 basis points. This will tighten the lira for the moment, and help to hold it up against the dollar, Derici said.

"The real pressure on the Turkish economy will come in August, when inflation rises and the bank is forced to raise rates," Derici said. "This will come just before we expect a rate rise from the Federal Reserve, which will also force the lira lower." 

As the central bank did not raise rates, in the coming weeks, the lira's fate will be decided by how the central bank manages liquidity. 

"The central bank can reduce liquidity at the benchmark rate, and oblige banks to borrow at the overnight rate," Yilmaz said. "Controlling liquidly in this way enables the bank to support the lira without recourse to interest rates. But we will have to see how the bank acts." 



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