In August's Monetary Policy Committee meeting, the Central Bank of Turkey announced on Tuesday that the one-week repurchase rate was held at 7.5 percent for the sixth consecutive month. Similarly, the overnight borrowing and lending rates were left unchanged at 7.25 percent and 10.75 percent respectively.
Meanwhile, the central bank announced policy changes will be applied prior to US Federal Reserve’s potential rate hike. As emphasised on July 30, the central bank said it will narrow its interest rate corridor system, which is the gap between the bank’s overnight lending and borrowing rates. As part of the “normalisation” process the central bank said the rates of reserve requirements will be adjusted when necessary.
Following the failed coalition talks between Turkey's leading parties, the possibility of snap elections has increased. Upon the news the Turkish lira reached a record high of 2.87 tl against the US dollar. The Central Bank’s decision to keep rates steady depreciated the lira further, leading it to reach a new low of 2.88 to the dollar.
Furthermore, the Federal Reserve is anticipated to hike interest rates in September, a move economists believe will affect the lira further. However, Central Bank governor Erdem Basci said earlier in July that “Turkey has no need to fear” a potential rate increase by the Fed, as the bank has the necessary tools to take precautions, such as hike in reserve requirements.
The last time Turkey made a dramatic change to its interest rates was in January 2014, a measure taken to reduce the loss of the Turkish lira against the US dollar and euro. Since then, the Central Bank has been cutting interest rates very slowly, a move highly criticised by the Turkish Government.
According to the Turkish Economy Minister Nihat Zeybekci, an interest rate cut by the Turkish Central Bank would benefit the Turkish economy. Zeybekci, a vocal critic of the central bank, said that he believes the bank will continue to ease rates to reduce the downward pressure on economic growth and job creation.