Turkey: Central Bank takes further action to stabilize the lira
August 20, 2013
During the month of August, the Central Bank of the Republic of Turkey (CBRT) made a number of significant decisions in an attempt to support the weakening lira. At its 20 August monetary policy meeting, the Bank decided to maintain the one-week repo rate at 4.50% and the overnight borrowing rate at 3.50%. However, it increased the overnight lending rate for non-primary dealers by 50 basis points to 7.75%, while leaving the rate on the borrowing facility for primary dealers unchanged at 6.75%. Market players were surprised by the asymmetric hike; they had expected the CBRT to keep all key interest rates unchanged.
In its statement, Central Bank argued that both domestic and external demand continue to expand at a moderate pace. The Bank also stressed that the current account deficit - excluding gold trade - continues to improve gradually. The weakness in capital flows seen in recent months is the result of uncertainty regarding global monetary policies. This trend will continue due to, "a more cautious monetary policy stance," adopted by the Central Bank. While the CBRT stated that inflation will start to decline beginning in August, the Monetary Policy Committee maintained its hawkish tone, stating that its current cautious stance - which might include additional monetary tightening - will remain in place until inflation returns to the medium-term target.
Following the meeting, the CBRT announced on 21 August that additional monetary tightening, which had been launched at July's meeting, will continue to be implemented every day until further notice. The Central Bank decided in July that it would not provide funding to banks via the primary dealer repo facility on "extraordinary days" (additional days of monetary tightening) in an attempt to gain flexibility and to shift the burden of supporting the lira to interest rates, rather than the country losing additional foreign reserves. This move means that the Central Bank has called off its regular 1-week repo auctions, thereby lending only at the top end of the monetary policy corridor (7.75%). The Bank also stated that it will sell a minimum of USD 100 million on "extraordinary days".
FocusEconomics Consensus Forecast panellists see the one-week repo rate to end the year at 4.68%. For 2014, the panel expects the rate to rise to 5.41%.