Turkey’s central bank decided to hold its interest rates steady on Wednesday for a second straight month, but tweaked others policy tools to support the lira.
The Monetary Policy Committee, led by Governor Erdem Basci, kept the one-week repo rate unchanged at 7.50 percent, in line with economists’ expectations. The bank last reduced the rate by 25 basis points in February and 50 basis points in January.
The overnight lending rate was held steady at 10.75 percent and the overnight borrowing rate at 7.25 percent.
Policymakers also assessed that a measured cut in the FX deposit lending rates and a measured hike in the partial remuneration rate on Turkish lira required reserves will support financial stability.
“These tweaks make the monetary policy setup even more complex and are likely to reinforce concerns that the CBRT is unwilling to defend the lira by raising official interest rates due to government pressure,” Capital Economics economist William Jackson said.
“The bigger picture is that the country’s gaping current account deficit, high inflation and relatively large dollar debts mean monetary conditions will need to remain tight, despite government pressure to revive the economy ahead of June’s elections.”
Loan growth remains at reasonable levels in response to the tight monetary policy stance and macroprudential measures, the bank said in a statement. It expects the favorable developments in the terms of trade and the moderate course of consumer loans to contribute to the improvement in the current account balance.
Given the backdrop of weak external demand remains weak and moderate contribution from domestic demand to growth, the bank stressed that the implementation of the announced structural reforms would contribute to the potential growth significantly.
“The ongoing cautious monetary policy along with prudent fiscal and macroprudential policies are having a favorable impact on inflation, especially inflation excluding energy and food (core inflation indicators)”, the bank said.
“Yet, uncertainty in global markets and elevated food prices necessitates maintaining the cautious stance in monetary policy.”
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