(Updates with oil price in eighth paragraph, dollar auctions in 12th.)
June 23 (Bloomberg) -- Turkey’s central bank left its benchmark interest rate unchanged, sticking to a policy of low rates even after inflation accelerated and the current-account deficit widened to a record. The lira extended losses.
The central bank in Ankara kept its one-week repo lending rate at a record low of 6.25 percent, according to a statement on its website today. That matched the forecast of 12 of 14 economists surveyed by Bloomberg. The bank will release minutes of the meeting within five working days.
Governor Erdem Basci is trying to slow economic growth without raising the benchmark rate and drawing in short-term capital. He has increased reserve requirements for banks four times since December to restrain lending and import demand. The industry regulator took steps this week to curb consumer lending, a move the bank today welcomed as a “contribution to balancing external and domestic demand.”
The decision “is disappointing for the market and it will undermine investor confidence towards the current policy stance,” said Benoit Anne, head of global emerging-markets strategy in London at Societe Generale, France’s second-largest bank. “I see further risk of a lira sell-off in the near term, as investors may now risk voting with their feet.”
The currency weakened after the announcement to its lowest in two years. It was trading at 1.6328 per dollar at 4:28 p.m. in Istanbul. Since the start of the year, the lira has fallen the most of 25 emerging-market currencies tracked by Bloomberg.
The bank is trying to tame a boom in consumer demand that’s drawing in imports, driving the current-account deficit to about 8 percent of gross domestic product.
Private consumption and investment are “moderate,” the bank said today, reiterating forecasts that the current-account balance will improve in the last three months of this year.
Turkey imports almost all its energy needs. The price of oil has fallen to about $91 a barrel today from a high of $114 in April. The central bank’s forecasts are based on a price of $115 per barrel this year.
The banking regulator on June 18 raised the cost of consumer lending for banks, adding to Basci’s efforts to damp credit growth and slow the domestic economy.
The central bank’s statement made no mention of higher interest rates, saying that the bank “maintains its policy stance.” It said it will monitor the impact of higher reserve requirements and “if needed, take additional steps in the same direction.”
Pressure on Lira
The bank “expects the policy to work, eventually,” Tim Ash, head of emerging markets at Royal Bank of Scotland Group Plc in London, said in an e-mailed comment. “Pressure on the lira will continue.”
The bank is buying up to $40 million a day and may opt to reduce or suspend the auctions soon, Haluk Burumcekci, chief economist at broker EFG Securities in Istanbul, said in an e- mailed report today.
The central bank and government say they want loan growth to slow to an annual 25 percent, from 35 percent now. The government is ready to respond with fiscal measures should the central bank’s actions fail to stem growth, Deputy Prime Minister Ali Babacan said June 7.
Budget spending excluding interest payments on debt rose an annual 12 percent in first five months of the year, leading up to the June 12 elections in which Prime Minister Recep Tayyip Erdogan won a third term. That’s faster than the 8 percent growth that the government plans for the year. The pace is likely to slow toward or perhaps below the goal, said Ozan Gaziturk, an economist for Istanbul-based lender Sekerbank TAS.
That would help slow the economy, which grew 8.9 percent in 2010. The 12-month current-account gap more than doubled from a year earlier to $63.4 billion in April, the most since records began in 1984.
The inflation rate rose to 7.2 percent in May from 4.3 percent a month earlier, the biggest jump in nine years. The bank said the increase was caused by a surge in grocery prices, and today reiterated a forecast of a slowdown in June. Its goal for the end of the year is 5.5 percent.
Basci’s increases of as much as 10 percentage points to bank reserve requirements have diminished the amount of cash they have to lend, forcing the index of banking shares, which includes Yapi & Kredi Bankasi AS, co-owned by Italy’s UniCredit SpA, down 12 percent this year. The main ISE National 100 index fell 7 percent in the same period.
--Editors: Ben Holland, Philip Sanders, Heather Langan.
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