Turkey Central Bank Cuts Rate for First Time in 13 Months

  • Central bank cuts overnight lending rate to 10.5 percent
  • Bank maintains one week repo and overnight borrowing rates

Turkey’s central bank, in a surprise decision, cut its overnight lending rate for the first time since February 2015, following a chorus of calls from top politicians to revive the economy with lower borrowing costs.

The bank reduced the overnight lending rate by 25 basis points to 10.5 percent. Only three of 19 economists in a Bloomberg survey predicted the move, with the median estimate calling for no change. The bank maintained its one-week repo and overnight borrowing rates at 7.5 percent and 7.25 percent respectively, according to a statement posted on the bank’s website.

The bank said its first rate cut in more than a year was a “measured step” to meet its earlier pledge to abandon a three-rate interest rate corridor in favor of a single-rate policy. While policy makers first signaled they would move to simplify policy once the U.S. Federal Reserve raised interest rates, they later put off the decision, citing the rise in global volatility following the U.S. rate increase in December. Limited improvement in core inflation indicators still required a tight liquidity stance, the bank said.

“The decision is a sign of loosening in monetary policy even as the central bank says liquidity will be kept tight,” according to Ibrahim Aksoy, an investment strategist at HSBC Asset Management in Istanbul who had accurately predicted the 25-basis-point cut to the overnight gauge. “We think there might be a move in USDTRY to above 2.9.”

The lira trimmed losses seen immediately after the decision and was trading 0.3 percent lower at 2.8836 per dollar at 2:47 p.m. in Istanbul.

Lira Assets

Recent increased appetite for lira assets may have persuaded the bank to begin narrowing the corridor, according to Piotr Matys, a London-based emerging markets FX strategist at Rabobank, who had predicted a 50-basis-point cut to the overnight lending rate.

“The external environment and sentiment towards the Turkish lira have improved sufficiently to seriously consider the possibility that the central bank” may finally narrow the interest rate corridor to simplify its unorthodox monetary policy, Matys said in an e-mailed note before the decision.

President Recep Tayyip Erdogan, his top advisers and a former economy minister have all over the last week called on the bank to lower the overnight rate, saying high borrowing costs were slowing growth and fueling inflation.

The bank said in its statement that a drop in volatility in global financial markets also influenced its decision to lower the overnight gauge.

“Recently, global volatility has eased to some extent,” it said in the statement. Policies since last August have reduced “the need for a wide interest-rate corridor,” it said.

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