Turkey's central bank cut all three of its main interest rates by 50 basis points on Thursday in an attempt to stimulate the faltering economy and guard against lira appreciation. The bank cut the one-week repo policy rate to 4.5 percent from 5.0 percent. It cut the borrowing rate to 3.5 from 4.0 percent and the lending rate to 6.5 from 7.0 percent.
The bank embarked upon a series of rate cuts last September in a bid to boost growth which slowed to 2.2 percent last year. It cut the main policy rate by 50 basis points in April. "The Committee indicated that, in order to balance the risks on financial stability, the proper policy would be to keep interest rates low while increasing foreign currency reserves via macroprudential measures," the bank said in a statement. The bank also raised forex required reserves for some maturities while raising by 0.1 point forex reserve option coefficients, the amount of forex that lenders have to provide to hold a portion of their required reserves in foreign exchange. The rate cuts had also been expected to stop cash from stimulus measures in Japan and other rich economies fuelling a rise in the lira.
The lira currency fell to its weakest since March on Thursday and traded around 1.8280 after the decision. Its real effective exchange rate (REER) was in April above the key level of 120 to the dollar identified by central bank governor Erdem Basci as a trigger for short-term rate cuts. Other central banks, including those of South Korea, Australia and Israel, have lowered rates in recent weeks to weaken their currencies and keep exports competitive to protect growth in the face of aggressive monetary easing elsewhere.
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