Turkish Lira rallies as Central Bank makes expected rate cut

ANKARA

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The Turkish Lira has rallied after Murat Çetinkaya kicked off his first meeting as Central Bank governor on April 20 by trimming the top end of the Bank’s interest rate corridor by 50 basis points, in line with expectations. 

The lira bounced to around 2.81 against the U.S. dollar from 2.83 after the Bank announced its rate decision. 

As expected, the Central Bank left its benchmark repo rate unchanged at 7.5 percent and instead cut the upper band of its interest rate corridor by an expected 50 basis points, to 10 percent. The Bank cut the same rate by 25 points last month for the first time in 13 months. 

The Bank has now kept its benchmark repo rate on hold at 7.5 percent for 14 consecutive months.
 
The rate policy meeting was widely seen by market players as a test for the new Central Bank chief, who investors fear may not be able to withstand political pressure on policy.

Seventeen out of 21 analysts surveyed by Reuters had predicted a cut of 50 basis points in the overnight lending rate, the highest of the three rates the bank uses to set policy.

“Recently, the decline in global volatility has continued and global financial conditions have improved. Along with these developments, the effective use of the policy instruments laid out in the road map published in August 2015 has reduced the need for a wide interest rate corridor. In this respect, the committee decided to take a measured step towards simplification,” said the Bank in a press release. 

In his first public comments since being named as governor, Çetinkaya said at a ceremony late on April 19 that he would try to keep inflation in line with targets, maintain a close eye on financial stability, and improve communication in order to bolster the Bank’s credibility.

“Recently, inflation showed a marked decline, which was mainly due to unprocessed food prices. This decline is expected to continue in the short run. However, improvement in the underlying core inflation trend remains limited, necessitating 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,” the Bank’s committee also said.