UPDATE -Turkey's Central Bank cuts overnight lending rate

UPDATES WITH QUOTES FROM TURKISH ANALYSTS

ANKARA (AA) – Turkey’s Central Bank on Tuesday cut its overnight lending rate by 25 basis points following recent reductions in the last three months.

The overnight lending rate, which is the rate at which banks borrow from the Central Bank overnight, went from 9 percent to 8.75 percent.

However, Turkey’s overnight borrowing rate, under which banks lend or deposit money to the Central Bank, remained unchanged at 7.25 percent.

The one-week repo rate, known as policy rate, was also kept at 7.5 percent, the bank said.

In late liquidity window interest rates (between 4.00 p.m. - 5.00 p.m.), the borrowing rate has been kept at zero percent and the lending rate has been reduced from 10.50 percent to 10.25 percent.

In a statement, the bank said: "Recently, domestic developments (coup bid) have led to fluctuations in financial markets. The Committee assesses that the recent liquidity measures have alleviated the volatility in financial markets.

"Moreover, the tight monetary policy stance, cautious macro-prudential policies and the effective use of the policy instruments laid out in the road map published in August 2015 have increased the resilience of the economy against shocks.

“Also, considering its contribution to the effectiveness of monetary policy, the Committee decided to take a measured and cautious step towards simplification."

The bank added that the developments in inflation outlook necessitate the maintenance of a tight liquidity stance.

-Message to financial market

Atilim Murat, an associate professor from Ankara’s TOBB ETU University, told Anadolu Agency on Tuesday:

“The Central Bank wants to give message to financial markets that everything is under control. They will monitor financial markets and – despite the failed coup attempt – everything will be fine, prices will be stabilized."

The bank has power to cut rates thanks to low inflation, according to KapitalFx analyst, Enver Erkan.

"In June, headline inflation was higher. However, core inflation has been in a downward trend until this summer," Erkan said.

The Central Bank had expected higher inflation rates in the summer months. The bank's total cut is 200 base points since 2015.

Inflation in the country increased over estimates in June, mainly due to a hike in food prices during Ramadan. The annual inflation rate rose to 7.64 percent in June from 6.58 percent in May, according to the Turkish Statistical Institute on July 4.

"The bank wants to balance that interest rate at eight percent. So, we expect that new cutting step will be smaller than before. If everything will be stable, the interest rate will have been cut more the 25 base points in August," Erkan added.

After the bank’s decision, the Turkish lira changed slightly on the day, at 2.9790 to the dollar from the previous session’s close of 2.9691.

Turkish officials, including President Recep Tayyip Erdogan, have also urged the Central Bank to boost growth with lower borrowing costs.

"This year the Central Bank moves with the expectations of the market and significantly increases its credibility," economist Bora Tamer Yilmaz at Ziraat Securities said.

"It seems that things are under control. We believe the bank will complete its simplification process successfully in the coming period," Yilmaz added.

Erol Gurcan, research specialist at Gedik Investment, said that the bank's decision was taken in order to give confidence to the markets.

"The decision's effects on foreign exchange rates would be limited. The Central Bank has taken a positive decision in the way of market trends," Gurcan said.

- Failed coup attempt

The deadly coup attempt happened late on Friday when rogue elements of Turkish military tried to overthrow the country's democratically elected government.

In the coup’s aftermath, Erdogan confirmed on Monday the government would convene a National Security Council meeting on Wednesday.

Serhat Gurleyen, head of research at Is Yatirim investment banking company, said the market would look at the National Security Council's decisions on Wednesday.

Meanwhile, shares in Borsa Istanbul, the country's main stock exchange, were down by 7.1 percent on Monday following Friday's coup attempt.

After the coup bid, Deputy Prime Minister Mehmet Simsek, responsible for the economy, consulted the head of the Central Bank and the treasury.

"Turkey’s failed coup will have only a minor impact on the country’s economy,” Simsek said on Monday in an interview with a private TV channel.

Simsek added that the Turkish economy will be one of the fastest-growing among Organization for Economic Cooperation and Development (OECD) countries in 2016.

GDP increased by 4.8 percent in the first quarter of 2016 compared to the same period last year, making Turkey one of the fastest growing economies in Europe and among OECD members.

International Monetary Fund head, Christine Lagarde, said in an interview on Bloomberg TV that Turkish officials reacted very strongly to provide confidence for investors.

"Market reaction to Turkey has been relatively moderate," Lagarde said.

The Central Bank said on Sunday that it would cut commission on daily liquidity options for banks to zero and provide unlimited liquidity to maintain financial markets.

The bank also said it would increase the daily foreign exchange auction limit from $50 million if necessary.