Turkey’s central bank likely to ease policy in the next few months

Turkeys central bank reduced its reserve requirement ratios on Tuesday last week to boost the liquidity in the financial system. The Turkish lira reserve requirement ratios were cut by 50 basis points for all maturity brackets, the Central Bank of the Republic of Turkey (CBRT) said in a statement.

The central bank expects the latest measures to release approximately 1.2 billion Turkish liras and $670 million of liquidity to the financial system. Turkeys economic growth is tepid and the CBRT believes that financial conditions remain tight even after a series of cuts in its rate ceiling.

Growth of bank credit has decelerated to match that of nominal GDP. The CBRT is likely to continue simplifying its policy framework as it continues with easing. However, sustained turbulence in global markets could pose some headwinds. The CBRT would be reluctant to ease under these conditions since the lira likely would be under pressure.

"We now expect two more 25bp cuts in the ceiling of its interest rate corridor and one 25bp cut in the floor. This would lower the corridor to between 7% (ON borrowing rate) and 8% (ON lending rate), leaving it centered on the 7.5% policy rate, symmetry the CBRT has long advocated." said J.P. Morgan in a report.