Turkey Holds Repo Rate at 7.5%, Cuts Lending Rate to 8.5%

Turkish central bank kept its benchmark one-week repo rate on hold at 7.5 percent on August 23rd, as widely expected, but lowered its overnight lending rate for a sixth time in a row to 8.5 percent despite high inflation and worries about possible credit rating downgrades. Policymakers said the tight monetary policy stance will be maintained given inflation expectations while considered that measured steps towards simplification would contribute to the effectiveness of policy. Inflation went up in July to hit a 6-month high of 8.8 percent, remaining well above central bank's 5 percent target.
Central Bank of Turkey | Joana Ferreira | joana.ferreira@tradingeconomics.com 8/23/2016 12:22:08 PM
Meanwhile, the bank kept the overnight borrowing rate at 7.25 percent.

Statement by the Central Bank of the Republic of Turkey:

Annual loan growth continues at reasonable rates in response to the tight monetary policy stance and macroprudential measures. Although developments in tourism revenues will have a negative impact in the short run, the lagged effects of the developments in the terms of trade and the moderate course of consumer loans will continue to contribute to the improvement in the current account balance. While domestic demand is having a positive impact on growth, albeit at a lesser extent, demand from the European Union economies continues to support exports. Accordingly, economic activity displays a moderate and stable course of growth. The Committee assesses that the implementation of the structural reforms would contribute to the potential growth significantly.

The adverse impact of domestic developments in mid-July on market indicators has been largely reversed due to improved global risk appetite and the recent measures. Moreover, the tight monetary policy stance, the cautious macroprudential policies and the effective use of the policy instruments laid out in the road map published in August 2015 have increased the resilience of the economy against shocks. Also considering its contribution to the effectiveness of monetary policy, the Committee decided to take a measured and cautious step towards simplification.

Unprocessed food prices, which have recently shown marked increases, are projected to display a downward correction in the short term. Meanwhile, the core inflation trend is expected to improve gradually. Yet, the developments in the inflation outlook necessitate the maintenance of a tight liquidity stance.

Future monetary policy decisions will be conditional on the inflation outlook. Taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained.
It should be emphasized that any new data or information may lead the Committee to revise its stance.

Turkey Holds Repo Rate at 7.5%, Cuts Lending Rate to 8.5%