ISTANBUL: Turkey's Central Bank cut its overnight lending rate by 100 basis points in a surprise move on Tuesday, keeping other key rates on hold and saying monetary policy would remain flexible due to global economic uncertainties.
After its monthly monetary policy committee meeting, the bank lowered the lending rate to 11.5 percent from 12.5 percent. It held its policy rate, the one-week repo rate, unchanged at 5.75 percent and kept its overnight borrowing rate at 5 percent.
"The committee said it was necessary to maintain a cautious stance in monetary policy for some time so that inflation expectations are in harmony with medium-term targets," it said.
The bank also said core inflation was expected to decline from February due to the effect of "positive cost elements".
The lending rate move triggered a weakening in the lira to 1.7555 against the dollar from 1.7490. The yield on the Dec. 4, 2013 benchmark bond declined to 9.04 percent after the statement from 9.12 percent.
Inflation in Turkey is just over 10 percent, almost twice the bank's main rate, a reflection of the fact that the bank is managing monetary policy mainly through banking sector liquidity rather than simply through the benchmark interest rate.
According to the latest twice-monthly central bank survey of economists' expectations, annual consumer price inflation is expected to end this year at 7.17 percent, above an official target of 5 percent.
Turkey's mix of a low policy rate, higher required reserve ratios and a wide gap between its borrowing and lending rates is aimed at countering a worryingly high current account deficit while balancing risks from its volatile lira currency.
The lira has rebounded 7 percent against the dollar since the start of the year, in a recovery induced by the central bank selling billions of dollars through auctions and direct intervention after the lira lost 20 percent over the course of 2011.
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