Turkey's Central Bank stunned markets on Thursday by cutting its policy rate, the one-week repo rate, to an all-time low of 5.75 percent to limit the risk of global economic woes triggering economic stagnation in Turkey, it said. At an emergency monetary policy committee meeting, the bank also raised its overnight borrowing rate, lifting it to 5 percent from 1.5 percent, narrowing the interest rate corridor to decrease volatility in short-term interest rates.
The overnight lending rate stayed at 9 percent. All 18 analysts in a Reuters poll had forecast the bank would raise its overnight borrowing rate from 1.5 percent, but only one forecast a cut in the repo rate. "Unbelievable they seem to be just targeting growth and don't seem to care about inflation," said analyst Timothy Ash at Royal Bank of Scotland.
Many analysts have criticised the bank's strategy of lower interest rates and higher required reserve ratios as far too dovish given Turkey's strong growth and a looming inflation risk, and had encouraged the bank to raise rates. Turkey notched 11 percent growth in the first quarter, though it is expected to slow over the rest of the year.
The bank's sudden MPC meeting before its next scheduled sitting on August 23 came as Moody's rating agency warned overdependence on "volatile" sources of foreign capital to finance a large current account deficit left it exposed to the eurozone's worsening debt crisis. Euro zone troubles have driven investors to withdraw money from riskier emerging markets, adding to pressure on the battered lira, which has lost around 10 percent of its value to the dollar this year. After the bank announced it had cut rates the lira weakened to as much as 1.7255 to the dollar from a previous 1.6950. The bank then announced it would hold forex selling auctions, helping the lira regain some losses to trade at 1.7190.
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