Turkish Central Bank trims main interest rate in a surprise move

ANKARA

Turkey's Central Bank governor Erdem Başçı.

The Turkish Central Bank has surprised markets by trimming benchmark interest rates 0.5 points, hinting it might opt for a gradual and moderate reduction, but said it remains committed to a tight policy.

The bank announced that the Monetary Policy Board (PPK) has decided to cut benchmark one-week repo rates to 9.5 percent from 10 percent.

“With the recent decline in uncertainties and improvement in the risk premium indicators, market interest rates have fallen across all maturities. In this regard, the committee decided on a measured decrease in the one week funding rate,” the bank said in a statement released after the PPK meeting.
The rate corridor has been kept steady at between 8 and 12 percent as the bank left overnight lending rates and overnight borrowing rates unchanged.

The bank reiterated that it will keep a tight monetary policy to reduce inflation to the desired levels by the year-end.

“Inflation expectations, pricing behavior and other factors that affect inflation will be closely monitored and the tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook,” the statement read.  Amid mounting pressure from the government to cut interest rates that raised reduction expectations, Central Bank Gov. Erdem Başçı has said the bank has room to reduce interest rates “gradually and moderately.”

However, inflation, which is set as the main driver of the bank’s monetary policies, has been higher than the bank’s year-end forecasts, lowering expectations of the bank making further reductions this month.

The bank had raised rates sharply at the end of January to combat a fall in the Turkish Lira to record lows amid an emerging markets sell-off and a corruption scandal.

The bank’s interest rate policy became a more heated object of curiosity after Prime Minister Recep Tayyip Erdoğan, a vocal opponent of high interest rates, urged the bank to cut rates after his ruling party’s strong showing in the March local elections, which he said had reduced political uncertainty.

The bank has already been reducing the average borrowing costs without resorting to rate cuts by providing more funding to the market through its one-week repo auctions at a fixed simple rate of 10 percent, rather than the 12 percent marginal lending rate.