Bloomberg News

Turkish Central Bank Won’t Shore Up Lira With Rates, Survey Says

October 19, 2011

Oct. 19 (Bloomberg) -- Turkey’s central bank is unlikely to raise interest rates to support the lira, even as the currency’s slide threatens to drive inflation further above its target.

The bank will probably hold the one-week repo rate at a historic low of 5.75 percent, according to all 14 economists surveyed by Bloomberg. The bank will announce its decision at 2 p.m. in Ankara tomorrow.

Governor Erdem Basci is battling to end the slump in the lira that he helped initiate. Basci cut the benchmark by half a point on Aug. 4, saying European debt problems pose a risk to growth. The lira has fallen 6 percent against the dollar since then, adding to a surge in inflation from tax increases. The bank spent more than $1 billion yesterday trying to arrest the currency’s fall.

“They’ll try to exhaust everything they have before they start with defensive rate hikes,” Neil Shearing, senior emerging-market analyst at Capital Economics Ltd. in London, said in a telephone interview. “Inflation is not the issue, for the bank it’s about counter-balancing the risks to growth.”

The bank has used up about 10 percent of its foreign currency reserves since July selling dollars to stem the lira’s decline. Yesterday it intervened directly in markets for the first time since 2006, hours after selling $750 million in an auction. Reserves were $85.1 billion on Oct. 7, according to central bank data.

The lira has slid 16 percent against the dollar this year, the worst performance among 25 emerging-market currencies tracked by Bloomberg. Turkey’s record current-account deficit, equal to about 10 percent of gross domestic product, and concern over the spreading European debt crisis have dented investor confidence.

Alcohol, Tobacco Taxes

The currency’s decline has made imported goods more expensive. Higher natural-gas tariffs and taxes on cars, phones, alcohol and tobacco announced this month will push prices higher. Inflation was 6.2 percent in September and is likely to “significantly” exceed this year’s 5.5 percent target, the bank said on Oct. 4. The increase will prove temporary and the 5 percent goal for 2012 can be reached, it said.

Yields on benchmark two-year lira bonds have risen to 8.6 percent, from about 8 percent at the start of September, on expectations of higher inflation.

Turkey’s economy is slowing after expanding an annual 8.8 percent in the second quarter. The government expects growth of 7.5 percent this year and 4 percent in 2012. The International Monetary Fund’s forecast for 2012 is 2.5 percent.

‘Surprise Instruments’

Inflation is a secondary concern for the central bank, which is more focused on shoring up growth and narrowing the current account gap, said Ibrahim Aksoy, an economist at Seker Securities in Istanbul. It will probably use tools other than interest rates, he said.

“They may opt to lower the reserve requirement for foreign currency,” Aksoy said. “The bank has been very creative since November and they’ve told us that they have ‘surprise instruments’ that they might use.”

The bank currently obliges lenders to set aside as much as 11 percent of foreign-currency liabilities as reserves.

--Editors: Ben Holland, Heather Langan.

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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