Central Bank of Turkey Decides to Cut Benchmark Interest Rate

The Central Bank of Turkey has cut the benchmark interest rate by 50 basis points, thereby sending the bond yields to a record low figure. Incidentally, though interest rate cut was expected, it being cut down by 50 basis points was not really perceived by the analysts. For the 1st time in this year, the 1-week repo rate has been cut by the Turkish Central Bank and the same has now been reduced to 5%, from its previous value of 5.5%. Many predicted that the benchmark rate would be reduced by 25 basis points.

While explaining this decision, the Central Bank stated that the capital inflows have sort of accelerated now. At the same time, loan growth is also hovering above the preferred rate of 15%. Erdem Basci, the Governor of the Turkish Central Bank stated that he will try to prevent any sort of appreciation in Lira, the major currency of Turkey. Incidentally, if Lira appreciates any further, the current account deficit of the country will widen as well. According to the bank officials, the most appropriate policy at this point of time will be to keep the interest rates at a low rate; however, the foreign currency reserves should be increased as well. The Central Bank also announced that the measures it took on today for adjusting rules on the bank reserves will lead to a $1.4 billion increase in the foreign currency reserves of the country.

According to the Emerging Market Economist of Standard Bank Plc., Timothy Ash, the Central Bank is trying to say that it is pretty worried when it comes to the outlook for growth. He added that in the past, the Central Bank has been kind of bullish on the growth outlook.

When it comes to the yield on the 2-year benchmark bonds of the country, the same experienced a decline of 17 basis points and it is currently at 5.58%. This marks the lowest level for the bond yields since April, 2005. On the other hand, Lira went down by 0.6% against Euro and it is heading towards the biggest drop of the same since 7th March.

Apart from all these, the bank also cut both the ends of its rates corridor on today, as it decided to reduce the overnight lending rate to 7%, from its previous value of 7.5%.