Bloomberg News

Turkish Central Bank Sees Less Need for Monetary Tightening

July 05, 2011

(Updates with comment from trader in fourth paragraph.)

July 5 (Bloomberg) -- Turkey’s central bank said the need for monetary tightening is lessening because growth will slow and the outlook for inflation is “positive.”

Action by the banking regulator on June 18 to raise the cost of lending to banks will “control the rapid expansion in credit,” according to a policy briefing published today on the Ankara-based bank’s website. Concern over debt sustainability in Europe may also curb growth and reduce the need for higher rates or reserve requirements for banks, the bank said.

Central bank Governor Erdem Basci is trying to slow growth from an annual 11 percent in the first quarter by restricting consumer credit. Data in the briefing document showed the rate of loan growth in June slowing below the average over the previous five years, supporting Basci’s case for adjusting growth through bank credit, not the benchmark rate.

“The central bank is as dovish as ever,” Isik Okte, a trader at Finans Invest in Istanbul, said by e-mail. “When they say the inflation outlook is good, that means to me they are going to stand behind their policies and not raise.”

Yields on benchmark two-year lira debt extended their decline after the announcement and were trading 7 basis points, or 0.07 percentage points, lower at 8.94 percent in Istanbul at 12:26 p.m. The lira was 0.9 percent weaker at 1.6300 per dollar.

Basci has held its benchmark one-week repo lending rate at a record low of 6.25 percent since January, seeking to deter capital inflows.

Quarterly GDP

The bank said quarterly growth will almost stagnate in the second quarter. Gross domestic product expanded 3.6 percent in the last three months of 2010 and 1.4 percent in the first three months of this year.

“The slowdown in domestic demand reduces the perceived need for additional tightening,” according to the statement.

Inflation slowed in June to 6.2 percent from 7.2 percent a month earlier, the statistics office in Ankara said on its website yesterday. That was less than the median forecast of 7 percent in a Bloomberg survey of 11 economists.

Inflation is on the bank’s forecast path, which leads to a year-end rate of 6.9 percent, the bank said today.

The bank said it may have to narrow the spread between its overnight borrowing and lending rates, currently 7.5 percentage points, if worries over debt sustainability in Europe cause a “weakening in capital flows to our country.”

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 and equivalent to about 8.5 percent of GDP.

--Editors: Heather Langan, Louis Meixler

To contact the reporter on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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