Bloomberg News

Basci Says Turkey Tightening on Credit, Inflation Risks

October 21, 2011

(Updates with Basci comments in fourth paragraph.)

Oct. 21 (Bloomberg) -- Turkey’s decision to raise lending rates applies “some tightening bias” to an economy in which credit growth remains very fast and there’s a risk of higher inflation, central bank governor Erdem Basci said.

There is “fundamentally no room” for a further weakening of the Turkish lira, as the currency’s real effective exchange rate is at a record low, Basci said at a panel in Warsaw today.

The bank yesterday raised the overnight lending rate to 12.5 percent from 9 percent, trying to limit the decline in the lira that threatens to drive the inflation rate further above the bank’s 5.5 percent goal for the year. Bond yields rose the most in five years today, jumping as much as 52 basis points, or 0.52 percentage point, to 9.66 percent.

The “growth rate of credit in Turkey significantly exceeds the real growth rate of the economy so we better slow it down further,” Basci said. “There is no harm in tightening via policy rates but without harming the overall cost structure of the financial system.”

The lira gained 0.8 percent to 1.8433 per dollar at 3:37 p.m. in Istanbul, extending yesterday’s gain. The currency fell to a low of 1.9096 per dollar on Oct. 4 and the bank intervened to sell dollars for lira in the market on Oct. 18, saying prices had become “unhealthy.”

Higher lending rates “would also be good for the currency because the currency has already depreciated quite a lot and we would not be happy with a further sharp depreciation in this overall uncertain environment,” Basci said. “So this is used as a protective device on the currency.”

‘Uncertainty, Volatility’

The bank left its benchmark one-week repo rate unchanged yesterday at 5.75 percent, a step Basci said doesn’t “really increase funding costs of the banks.” The bank has introduced “some element of uncertainty, volatility there so that they would also reflect that volatility on the pricing of their credit.”

Bank loans grew 39 percent from a year ago, according to Oct. 17 figures from the industry regulator.

The currency’s decline has boosted imported costs at the same time that the government raised taxes on cars, phones, alcohol and tobacco this month. Inflation, which was at 6.2 percent in September, is likely to “significantly” exceed this year’s 5.5 percent target, the central bank said yesterday.

“We have to be very careful about this disinflation process,” Basci said. “Right now there are risks in the coming months so we have immediately turned to tightening by hiking the interest rate corridor to avoid future risks on inflation.”

Turkey’s economy may slow after expanding 8.8 percent in the second quarter from a year earlier. 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

--With assistance from Steve Bryant in Ankara. Editors: Ben Holland, Karl Maier.

To contact the reporter on this story: Piotr Skolimowski in Warsaw at pskolimowski@bloomberg.net

To contact the editor responsible for this story: Katya Andrusz at kandrusz@bloomberg.net


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