High external financing risks and inflation concerns would limit the scope for Turkey's central bank to engage in further monetary loosening, after it stepped into the easing mode this week by narrowing the 'interest rate corridor' with a 150-basis point cut in the lending rate, Capital Economics Emerging Markets Economist William Jackson said Thursday.
According to Capital Economics, a further deterioration in the external environment, including a possible worsening of the tensions in the euro zone next year, and high inflation concerns could force the central bank to bring interest rates back to the top end of the rate 'corridor'.
The latest rate cut is partly cosmetic and its impact on domestic demand and the overall economy is likely to be limited, as banks rarely use this facility to borrow from the central bank. Also, banks normally don't pass on the lower funding costs to businesses or households, the firm said.
The central bank, in the latest rate-setting session, retained its benchmark one-week repo rate at 5.75 percent, but lowered the overnight lending rate by 150 basis points to 10 percent. The bank also reduced the upper limit for its one-month repo auctions to 3 billion lira from 5 billion, and raised the 'reserve option coefficients' for foreign currencies held as required reserves against lira-denominated liabilities.
The economist assessed that the rate cut reflects the central bank's confidence that external financing risks have eased. Also, the bank was influenced probably by a demand by some politicians for a looser monetary policy after the GDP growth decelerated sharply and domestic demand contracted further.
Turkey's dependence on foreign capital inflows to fund its current account deficit and to roll over short-term external debt makes the economy highly vulnerable to global uncertainties.
by RTT Staff Writer
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