ON THE CBRT INTEREST RATE CUTS
Central bank: tcmb | Type: decision | Date: 2003-04-25

Number: 2003-17
April 25, 2003
PRESS RELEASE
ON THE CBRT INTEREST RATE CUTS
I. GENERAL EVALUATION
crucial risk factors that may have a negative impac t on inflation in 2003, and pursued a
cautious strategy while setting interest rates in t he light of these risks. These risks are
listed as (i) the upsurge in domestic demand beyond predictions in line with the improvement
in expectations, (ii) the increase in agriculture an d food prices owing to seasonal conditions,
(iii) the likelihood of increased production costs due to the pressure exerted by Iraqi war on
oil prices and exchange rates. It has also been poin ted out that if fiscal discipline and
structural reforms were followed without any disrup tion, exogenous shocks to be created by
Iraqi issue might have led to temporary rises in inflation.
2. The Central Bank stressed especially in its press release of March 11, 2003 that
the future course of inflation would basically depe nd on two factors. The first one was
economic fundamentals and the second one was the po ssible impact of Iraqi developments on
our country. Moreover, the period starting from the date of the said announcement up until
the end of Iraqi issue was called “extraordinary period.”
3. In the said announcement it was also underlined t hat economic fundamentals had been
reinforced with the extra measures taken in the fram ework of the 2003 budget, and with
the ongoing monetary discipline. It was clear that the downward trend in inflation would
continue also after the “extraordinary period” provi ded that the economic program was
strictly implemented.
4. Furthermore, it was pointed out that there might be some deviations from the main
trend during the “extraordinary period” depending o n the outcome of Iraqi crisis and if so,
this deviation would only be temporary. In fact, th e inflationary course is affected by
monetary and fiscal discipline, and the environment of confidence created by this discipline
and the optimistic expectations ensued thereafter. I t was added that the measures taken
represented a tight discipline, and the environment of confidence would expand thanks to
strict implementations and thus, the impacts of an exogenous shock such as Iraqi crisis would
almost certainly remain as a temporary deviation from the basic trend.
5. It will not be wrong to assume that the Iraqi issu e has been settled with respect to
inflationary analysis, and accordingly the extraordi nary period has come to an end. During
this period, the inflationary pressure exerted by th e cost elements, which emerged
especially due to fluctuations in crude oil prices and exchange rates, has now disappeared.
Although not considerable, some delayed effects of these movements on prices may later be
felt to some extent. On the other hand, according to the current indicators, domestic
demand is not expected to exert a significant pressur e on inflation at least in the short-
6. The Iraqi issue was not the sole reason that led to a deviation, albeit slight, from
the main trend of inflation in the first quarter of 2003. There is no doubt that the price
increases in agriculture and food products at consi derably high levels owing to the weather
conditions, and the public price adjustments, which were postponed due to elections, played
significant role in this deviation as well. Another impact in the same direction is the “base”
effect that was also emphasized in our announcement of March 11, 2003. As is known, two
distinct movements were observed around the main do wnward trend in the 2002 inflation.
Although de-seasonalized inflation rates pursued a relatively low course until June, an
adverse trend was observed in the rest of 2002. Therefo re, even if the said temporary
factors did not happen, a significant drop in annua l inflation rates in the first half of 2003
was not expected by the Central Bank because of the “base” effect.
7. Undoubtedly, the Central Bank, whose primary objective is price stability, does not
make its short-term interest rate decisions in acco rdance with the temporary movements in
inflation that may occur due to exogenous shocks and weather conditions The most important
point with respect to our policies is the future tr end of inflation, and whether the inflation
target will be achieved or not.
8. The 2003 Budget, which was approved by the Turkish Parliament and put into force,
is a drastic step that shows the determination of s ustained fiscal discipline. Conclusion of
the suspended fourth review, which was conducted wi th the IMF, was another development
that dispelled the worries of economic agents on th e implementation of the program in
recent months. Furthermore, the budget performance and the realizations of some measures
taken for establishing fiscal discipline are favorable.
9. Considering the significant drop in the 2002 inflatio n thanks to the current
program, and the developments mentioned above, whic h signifies a clear expression of intent
to continue with this successful program with deter mination, the Central Bank maintains a
cautious optimism over the inflation for the next pe riod. Continuation of this optimism and
without making reference to adjective “cautious” wi ll certainly depend on the implementation
of the program with the same determination.
II. THE CENTRAL BANK INTEREST RATES
10. In the light of the evaluations above, starting f rom April 25, 2003, the CBRT has
decided to cut short-term interest rates applied at CBRT Interbank Money Market and
Repo-Reverse Repo Market at Istanbul Stock Exchange as follows:
Overnight Interest Rates: Borrowing interest rate was cut to 41 percent from
44 percent and lending interest rate to 48 percent from 51 percent.
b) Other Maturity: One-week borrowing interest rate was cut to 41 percent from 44
c) Late Liquidity Window Interest Rates: In the framework of Late Liquidity
Window application, the CBRT overnight borrowing int erest rate applicable
between 16:00 – 16:30 at Interbank Money Market was cut to 53 percent from 56
percent. Borrowing interest rate of 5 percent remained the same.
Moreover, the interest rates on overnight and one-w eek maturity borrowing facilities
provided for banks via repo transactions in the fra mework of open market operations were
cut to 44 percent from 47 percent.