By www.CentralBankNews.info Turkey’s central bank held its benchmark interest rates steady but will provide up to 9.0 billion lira in liquidity through weekly auctions, saying a flexible monetary policy stance was appropriate given “continued uncertainties about the global economy and volatility in capital flows”
The weekly and monthly funding auctions comes after the Central Bank of the Republic of Turkey (CBRT) last week tightened short-term policy by reducing liquidity and holding unsterilized foreign exchange sales due to “excessive volatility” in the foreign exchange market.
Following a meeting of its Monetary Policy Committee, the CRBT said the weekly auctions beginning June 19 would provide between 0.2 and 9.0 billion lira and the upper limit for one-month repo auctions had been set at 0.5 billion lira.
The CBRT said if there was any need to change the upper or lower limits of the funding required, either via the weekly or monthly auctions, it would announce the changes.
The central bank said domestic demand continued to show a healthy recovery while exports were slowing down due to weak global demand and there was increased uncertainty about monetary policy due to changes in global capital flows.
Like most emerging markets, Turkey’s lira and its markets have been under pressure in recent weeks from an expected reduction in asset purchases by the U.S. Federal Reserve. In addition, Turkey has also been suffering from domestic political unrest.
The lira has lost 4.8 percent since early May when it started to weaken and was quoted at 1.88 per U.S. dollar today. Since the beginning of the year, it has lost some 5.3 percent.
“In this context the effect of exchange rate movements on domestic demand and the increase in loans will be closely monitored,” the central bank said.
The depreciation of the lira tends to boost inflation through higher import prices. Turkey’s inflation rate rose to 6.51 percent in May from 6.13 percent in April, but down from 7.29 percent in March.
The recent outflow of capital from Turkey is in stark contrast to years of inflows which has put upward pressure on the lira and stoked local asset prices.
The central bank has been cutting its benchmark and overnight interest rates in recent months to discourage the inflow of capital and boost domestic economic activity.
Most recently in May, the CBRT cut its benchmark, one-week repo rate by 50 basis points to 4.5 percent, and its overnight borrowing rate – the ceiling in the central bank’s interest rate corridor – was cut by the same amount to 3.5 percent and the overnight lending rate to 6.5 percent.
It was the central bank’s second cut in its one-week repo rate this year, bringing this year’s rate cuts to 100 basis points following a 25 basis point cut in 2012.
Turkey’s economy has been recovering after economic growth slumped to 2.2 percent in 2012 from 8.8 percent in 2011. It is expected to grow by around 4.0 percent this year.
In the first quarter of this year, Turkey’s Gross Domestic Product expanded by 1.6 percent from the fourth quarter for annual growth of 3.0 percent, up from 1.4 percent.