Turkey springs rate cut, says risks ease, policy still tight

Turkey's central bank on Thursday cut one of the interest rates in its armoury of defences against crises, saying that uncertainty and risk had fallen. The bank cut its one week repurchase rate, used by commercial banks for short-term funding, from 10.0 percent to 9.5 percent in what it described as a "measured decrease".
But the bank's monetary policy committee said that even after this decision, "the monetary policy stance will continue to be tight" until there was a significant improvement in the outlook for inflation. The bank kept its other main interest rates steady at high levels. Regarding overnight rates, the marginal funding rate was held at 12.0 percent, the rate on facilities for primary dealers via repurchase transaction at 11.5 percent, and the borrowing rate which is in fact the deposit rate at 8.0 percent.
Last year the bank engineered what analysts said was an unduly complex system of interest rates, ramping up and rationing overnight funds while, for a period, holding down benchmark rates amid government pressure not to raise them. "With the recent decline in uncertainties and improvement in the risk premium indicators, market interest rates have fallen across all maturities," the bank said on Thursday. "In this regard, the Committee decided on a measured decrease in the one week funding rate."
Prime Minister Recep Tayyip Erdogan said last month after his Islamic-rooted party scored a sweeping victory in March 30 local polls that the bank should cut interest rates to stimulate the economy. Last year the lira fell sharply on concern on financial markets about social and political unrest, and also because of a high balance of payments deficit and a high level of credit in the economy.
Economist William Jackson from the London-based Capital Economics said the surprise rate cut on Thursday in spite of Turkey's external vulnerabilities and high rate of inflation, was likely to raise concerns that the central bank was "bowing to government pressure to ease monetary policy". Jackson suggested that it looked like the bank would continue to ease policy over the coming months. "But given the country's persistent external vulnerabilities and high rate of inflation, we think additional rate cuts will be small in scale," he said.