Turkish Central Bank takes step to simplify monetary policy

The Central Bank of the Republic of Turkey (CBRT) decided to take a measured step toward simplification as global volatility eased to some extent, reducing the need for a wide interest rate corridor, the bank said Friday. If the underlying core inflation trend remains limited, the central bank indicated that the maintenance of a tight liquidity stance would be necessary. The central bank held key interest rates at their current levels, apart from the marginal funding rate Thursday. The one-week repo rate will be kept at 7.5 percent, while the borrowing rate will remain at 7.25 percent. The overnight lending rate will be cut from 10.75 to 10.5 percent.

"Headline inflation has declined recently but core indicators have remained at high levels due to the sluggish impact of exchange rate developments," the Central Bank said in its presentation to economists, according to information on the bank's website on Friday.

The move came with no surprise to economists, a majority of whom had forecast a hold in rates and a simplification of the monetary policy structure, as promised by the Central Bank in August.

The country's annual inflation rate fell to 8.78 percent in February of the year from 9.58 percent in January, while annual inflation on a 12-month moving average basis rose to 8.45 percent over the same period, the Turkish Statistics Agency (TurkStat) said on March 3. The central bank forecasts year-end inflation to be 7.5 percent.

The bank said that cost-push inflationary pressures have eased in recent months due to a gradual fall in imported input prices. "Medium-term inflation expectations have slightly improved in March," it added.

According to the bank, global volatility has recently eased to some extent and risk appetite has improved, and "as a response, portfolio flows to emerging economies have displayed some recovery in recent weeks."

The volatility of the Turkish lira has declined relatively since the implementation of the policy instruments set forth in the August 2015 road map, bank officials also indicated. "The Forex demand is expected to decline significantly in the upcoming periods due to an improvement in the current account deficit and low energy prices. Meanwhile, the FX liquidity tools will continue to be used to stabilize the value of the Turkish lira," the bank added. Also, Turkish central bank said Friday its 2015 net profit rose 60.4 percent to TL 13.9 billion ($4.8 billion). The bank's net profit for 2014 was TL 8.6 billion.