Central bank keeps all interest rates on hold as expected
by Şeyma Eraz
ISTANBULJul 23, 2015 - 12:00 am GMT+3
by Şeyma Eraz
Jul 23, 2015 12:00 am
The central bank held all interest rates steady following its July meeting due to the delayed improvements of core indicators because of exchange rate fluctuations. The bank will follow the inflation outlook
The Central Bank of the Republic of Turkey (CBRT) held all key rates as expected following the July meeting of the monetary policy committee on Thursday. It left its benchmark one-week repo and overnight borrowing rates at 7.5 percent and 7.25 percent, respectively. The bank also kept the marginal funding rate steady at 10.25 percent. The committee's reasons for its decisions were delayed improvements in core indicators, uncertainty in global markets and volatility in energy and food prices.
Exchange rate movements delay improvements in core indicators, according to the committee. Last week, the U.S. Federal Reserve (Fed), the central bank of the United States, announced the first interest hike in the last 10 years might occur in 2015 thanks to economic recovery. The dollar peaked this week against all currency in response to the Fed's statement. The Turkish lira reached 2.72 against the dollar from 2.65 in four days. The terrorist attack in rural Suruç, Şanlıurfa, in the southeast, also negatively affected the value of the Turkish lira. The bank said future monetary policy decisions would be conditional on improvements in the inflation outlook. The CBRT applies a tight monetary policy to prevent an inflation hike in the country. However, inflation dropped sharply in June, the lowest rate in two years, according to data released by the Turkish Statistical Institute (TurkStat). The Consumer Price Index decreased 0.51 percent in June compared to May on a monthly basis, bringing the annual inflation rate to 7.2 percent in June from 8.09 percent in May. The decrease still could not impress the bank, and the CBRT kept all interest rates on hold during its June meeting, while pointing to inflation as the main reason. On the other hand, current political uncertainty in the country makes the decision-making process harder for the bank.
Inflation expectations, pricing behavior and other factors that affect inflation will be monitored closely, and the cautious monetary policy stance will be maintained by keeping a flat yield curve until there is a significant improvement in the inflation outlook, the committee explained after yesterday's meeting. The CBRT also emphasized that any new data or information may lead the committee to revise its stance.
The committee also pointed to structural reforms announced by the government before the general election. The committee believes that the implementation of the announced structural reforms would significantly contribute to potential growth. However, those reforms have to wait until the formation of a government, either a coalition government or a new government after a possible snap election.
Meanwhile, Economy Minister Nihat Zeybekci commented on the CBRT's interest rate decision, and said although he does not welcome the decision, there is nothing else to do in the current position. "I think further improvements in inflation will encourage the bank [to decrease interest rates]," Zeybekci said. He added that a possible snap election will not have a negative effect on the economy. "Loan growth continues at reasonable levels in response to the tight monetary policy stance and macro-prudential measures. Favorable developments in terms of trade and the moderate course of consumer loans contribute to improvement in the current account balance. External demand remains weak, while domestic demand contributes to growth moderately," the committee said.