Turkey narrows rate corridor in 0.5 pct lending cut
The Central Bank of Turkey announced on Tuesday that it has slashed the key overnight lending interest rate to 9 percent from an earlier 9.5 percent, the third such cut in a row, in order to spur economic growth.

The decision followed the bank's regular policy meeting on Tuesday. This is the third adjustment after nearly seven months of keeping the borrowing rate unchanged, a decision that comes as domestic growth slows and inflation rates rise. The decline in the upper end of the interest rate corridor was in line with market expectations.

The central bank has been varying borrowing rates within the interest rate corridor to combat inflation and/or to kick start economic growth since last year. Central Bank Governor Erdem Başçı said last week that the bank could cut its overnight borrowing rate, the lower end of the rate corridor, or the policy rate, if the lira keeps climbing. The bank kept the one-week repo rate unchanged at an all time low of 5.75 percent and the overnight borrowing rate steady at 5 percent. "The decision to cut the upper end of the bank's flexible rate corridor was made amid continued global economic uncertainty," the bank said in a written statement. The bank's message also said that it would consider cutting the overnight borrowing rate and the one-week repo.

Tuesday's decision adds to expectations that the bank would now opt for easing of its monetary policy. The bank started cutting the overnight lending rate in September to counter a slowdown in the economy, but has kept its overnight borrowing rate at 5 percent and its main policy rate, the one-week repo rate, at a record low of 5.75 percent since August 2011. In addition to triggering growth, one of the aims of Tuesday's decision was to slow Turkey's rate of inflation. Turkey's inflation rate dropped to its lowest percentage in 11 months in October, decreasing to 7.8 percent from 9.2 percent the previous month. The central bank on Oct. 24 revised its forecast for year-end inflation to 7.4 percent from 6.2 percent, citing higher oil prices and taxes.

The lira gained noticeably following Fitch's decision last week to upgrade Turkey's credit rating to investment level, a move that could inject a hot flow of money into Turkish markets. Fitch's rival Moody's, which rates Turkey one level below investment grade, holds a conference in İstanbul today. The rating agency has earlier signaled it could follow with an upgrade to investment level as well.

The Turkish lira was traded at 1.8 to $1 when the central bank announced its decision. The lira has gained 5 percent this year, compared with an 18 percent decline last year. Garanti Yatırım's Gizem Öztok Altınsaç said the devaluation of the Turkish lira would be limited following the bank's decision. Altınsaç said they expected a cut in borrowing rates following the bank's December meeting. The central bank's decision to cut from the top end while leaving the lower end unchanged should be taken as a sign of caution, Tim Ash, chief emerging market economist at Standard Bank Plc., said on Tuesday.

(Cihan/Today's Zaman) CİHAN
Last Modified: 2012-11-20 20:00:01
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