The Central Bank of the Republic of Turkey (CBRT) cut the marginal funding rate from 10.75 to 10.50 percent yesterday, keeping the key interest rates on hold at 7.5 percent for a one-week repo and 7.25 percent borrowing rate. Considering the slight decrease in volatility in global uncertainties, the CBRT Monetary Policy Committee decided to narrow the gap between the lowest and highest interest rate levels as a cautionary step for simplification - in reference to the bank's plans to change the three-level interest rate system to one key rate. The crucial meeting, overseen by CBRT Governor Erdem Başçı, was the last headed by the governor who is nearing the end of his term in April and may not be reappointed.
"Recently, global volatility has eased to some extent. Moreover, with the effective use of the policy instruments laid out in the road map published in August 2015, the need for a wide interest rate corridor has been reduced," a statement by the bank read. "In this respect, the committee has decided to take a calculated step toward simplification. However, improvement in the underlying core inflation trend remains limited, making it necessary to maintain a tight stance on liquidity." The bank added that economic growth, maintained by exports fueled by a rising demand from European Union member states, was favorable.
The move was expected by economists, a majority of which had previously forecast a hold in rates and a simplification of the monetary policy structure as promised by the CBRT in August. "The [CBRT] needs to take care of the core inflation trend as [it is under increasing pressure]," said ALB Securities analyst Enver Erkan. "There is still a need for a large interest rate corridor, so that the basic aim of monetary policy may continue in order to make domestic markets less susceptible to foreign shocks. If the negative trend in the global economy persists to the end of the year, these sorts of steps cannot be sustainable. We expect no market volatility, but the Turkish lira would be weaker against the dollar in the middle- and long-term," he added.
