Markets keep sliding as central bank reduces interest rates
Posted by meb at November 21st, 2008
In a move that took the markets by surprise, the Turkish Central Bank decided on Wednesday night to lower interest rates.
After a two-hour Monetary Policy Committee (PPK), the bank announced that it had cut the overnight borrowing rate by 0.5 points from 16.75 to 16.25 percent and the overnight lending rate by 1 point to 18.75 from 19.75 percent. In a written statement yesterday, the bank also said that the sharp decline in oil and other commodity prices would have a favorable impact on efforts to curb inflation.
The markets had anticipated that the central bank would leave interest rates unchanged, so the cut was received with surprise by investors. Reactions to the bank’s interest decision were not positive in the markets yesterday. The İMKB dropped 701 points on Thursday. The index closed at 21,228.27 points, and stocks had lost 3.20 percent of their value by the end of the day. The currency market was also turbulent as one dollar was traded for as high as YTL 1.74 in the free market. In the interbank market, the highest level reached in YTL/dollar trading was 1.71, while the indicator T-bill with a maturity date of June 23, 2010 was being traded for 22.55 percent at 12:00 p.m.
“We expect that inflation will display a more rapid fall than previously envisaged,” the statement emphasized. Also, the interest rate on the borrowing facilities of overnight and one-week maturity provided for primary dealers via purchase agreement transactions was decreased from 18.75 percent to 17.75 percent.
“Recent readings indicate a significant slowdown in domestic economic activity. Ongoing problems in international credit markets and the global economy will continue to restrain both domestic and external demand for an extended period, limiting the pass-through from exchange rates to domestic prices,” the central bank noted in a written statement released the same day.
In this respect, the PPK has decided to lower the borrowing rates by 50 basis points. Moreover, the margin between the lending and borrowing rates was reduced by a further 50 basis points in order to contain the potential volatility in short-term interest rates.
Furthermore, the statement underscored the importance of maintaining the smooth functioning of the financial system and the efficiency of credit markets. “Thus the PPK decided to implement additional measures regarding foreign exchange liquidity,” it added.
According to the statement, the central bank will continue to take the necessary measures to contain the adverse effects of the global financial turmoil on the domestic economy, provided that they do not conflict with the price stability objective. “Future policy decisions will largely depend on the developments in global markets and their reflections on the domestic markets,” it noted. The central bank also emphasized that the PPK would revise its stance in accordance with any new data or information related to the inflation outlook.
The central bank also announced yesterday that they had decreased the lending rate for banks in foreign exchange. The repayment period for banks that borrow foreign exchange from the central bank is increased from one week to one month. The interest rate, which was 10 percent, was decreased to 7 percent for the US dollar and 9 percent for the euro. The bank issued a written statement yesterday, noting that the decreases would be valid starting from today. The central bank noted that it had recently launched measures to ensure that foreign currency remains in the country by re-introducing the system of financial intermediation between banks to establish better control of their foreign exchange reserves. The statement noted that the central bank expects to ease the burden on market operations that require liquidity.
Elsewhere, the Bank of England (BOE) decided to slash interest rates by 2 percentage points, in excess of 200 basis points, to ensure that inflation did not undershoot the 2.0 percent inflation target over the medium term. It is expected that another sharp interest rate reduction could be coming at the next meeting in December.
Overseas, the US Federal Reserve on Wednesday sharply lowered its projections for economic activity this year and next, and signaled that additional interest rate reductions may be needed to help combat the worst financial crisis to jolt the US in more than half a century.
source: Today’s Zaman
Related posts: