Turkey's Central Bank keeps interest rates unchanged

Published 26.10.2017 14:03 Modified 26.10.2017 17:40
emFile Photo/em
File Photo

The Central Bank of the Republic of Turkey (CBRT) said Thursday its Monetary Policy Committee has decided to keep short-term interest rates steady.

The bank said in a statement that the one-week repo rate, also known as the bank's policy rate, was held at 8 percent.

The marginal funding and overnight borrowing rates were also unchanged at 9.25 and 7.25 percent, respectively.

The bank also kept late liquidity window interest rates steady -- the borrowing rate at 0 percent, and the lending rate at 12.25 percent. It said that the recovery in economic activity in Turkey had gained strength.

According to the Turkish Statistical Institute (TurkStat), Turkey's economy showed growth of 5.1 percent in the second quarter of the year.

"Domestic demand conditions keep improving, and demand from the EU economies continues to contribute positively to exports," the bank said.

The country's exports to the EU, which accounted 45.3 percent of total exports, rose 10.8 percent to $103.3 billion in the first eight months of the year.

The implementation of structural reforms would contribute significantly to potential growth, the bank said. It added that the current level of inflation and developments in core inflation indicators pose risks to pricing behavior.

The annual inflation rate stood at 11.2 percent in September and 10.68 percent in August, according to TurkStat.

"Accordingly, the Committee decided to maintain the tight stance of monetary policy," read the statement.

The expectation of the market was already in this direction, said Enver Erkan, deputy research manager at KapitalFX, regarding the decision. He also said the devaluation of the Turkish lira can be expected to be reflected on the inflation side due to exchange transitivity.

"This, in turn, increases the likelihood that the positive base effect expected at the end of the year will decline and that inflation will be above expectations," he added.

Erkan argued that the market was expecting the Central Bank to make a more "hawk" statement and announce measures to tighten liquidity conditions.

"As known; the Central Bank is adjusting policy stance according to long-term trends and expectations in the inflation. Therefore, inflation must be reduced in a reliable and meaningful way in order for the monetary policy to move to the normalization phase," he said.

"Based on this year's inflation and year-end expectations, we can foresee that the Central Bank will not lower interest rates below its current levels in the remaining two months of the year. The continuation of the tight monetary policy seems necessary for a while," Erkan said.

When compared to the targets in the medium-term program, Erkan said, it is clear that the Central Bank will maintain its tight monetary policy in the near future.

"In this context, we do not expect any changes in interest rates until the end of the year," he said.

Evaluating the effect on the market, Erkan said, "After a recent non-normal news flow and an increase in the pressure on Turkish lira, the fact that the Central Bank did not make any changes in interest rates was perceived as inactivity and caused the dollar/lira exchange rate to rise to 3.78 after the decision."

Share on Facebook Share on Twitter