Bloomberg News

Turkey Holds Benchmark Rate After Funding Cost Increase

November 23, 2011

(Updates with Fitch in sixth paragraph, market prices in seventh paragraph.)

Nov. 23 (Bloomberg) -- Turkey’s central bank kept the benchmark interest rate at a historic low after almost doubling the cost of borrowing for banks last month to support the lira and combat accelerating inflation.

The central bank held the benchmark one-week repo rate at 5.75 percent, the Ankara-based bank said on its website today. That matched the estimate of all eight economists surveyed by Bloomberg. The bank will release minutes of the monetary policy committee’s meeting within five working days.

Governor Erdem Basci on Oct. 26 announced plans to vary bank borrowing costs on a daily basis between 5.75 percent and 12.5 percent, while keeping the benchmark rate steady. It’s the right mix to manage volatile capital flows and support the lira amid turmoil from Europe’s sovereign debt crisis, he said.

“There’s not much left to decide at the monetary policy committee since the bank started to manipulate interest rates on a daily basis,” Nilufer Sezgin, an economist at Ekspres Invest in Istanbul, said in an e-mailed report. The bank will want to maintain “flexibility, given the mounting uncertainties about the European sovereign debt crisis.”

The bank will track the impact of the measures on credit markets and will provide “timely” adjustment of one-week repo funding “on both sides, if needed,” according to an e-mailed statement accompanying today’s decision.

Rating Outlook

Turkey had its foreign currency rating outlook cut to “stable” from “positive” today by Fitch Ratings, which pointed to the trade deficit and rising inflation as bringing an “increase in near-term risks.”

The lira extended earlier losses, declining 0.8 percent to 1.8663 per dollar at 3:46 p.m. in Istanbul. Yields on two-year benchmark bonds rose 9 basis points, or 0.09 percentage points, to 10.61 percent.

The central bank today offered 4 billion liras ($2.2 billion) in one-week funding at the benchmark rate. Yesterday it withheld such funding, forcing banks to use more costly channels. The bank has also frequently adjusted reserve requirements on dollar and lira liabilities to manage credit demand and liquidity in the foreign-exchange market.

Pressure on Yields

Yields on benchmark two-year lira debt have jumped more than a percentage point since the new policy began. The lira has fallen more than 4 percent against the dollar, extending its decline this year to 17 percent.

“We see the lira continuing to decline,” Gizem Oztok, an economist at Turkiye Garanti Bankasi AS in Istanbul, said in an e-mailed report. “We think there’s potential for bond yields to increase further.”

The central bank said it expects a “more significant” improvement in Turkey’s current-account deficit, which reached about 10 percent of economic output in September, before the end of the year. Loan growth is at more moderate levels and the secondary impact of a recent rise in items such as energy prices on inflation will be “limited,” it said in the statement accompanying the rates decision.

The depreciation in the lira will help narrow Turkey’s current account by assisting exporters and the bank is now focused on minimizing its impact on inflation, according to a policy document published Nov. 18 on the bank’s website. The current-account deficit widened to a record $77.5 billion in the 12 months through September.

Consumer price inflation accelerated to 7.7 percent in October from 6.2 percent after prices jumped 3.3 percent in the month, the most for nine years. Inflation may end the year at 8.3 percent, exceeding the target of 5.5 percent, before easing at the start of 2012, according to central bank forecasts.

--With assistance from Giovanni Salzano in Rome. Editors: Ben Holland, Karl Maier.

To contact the reporter on this story: Steve Bryant in Ankara at

To contact the editor responsible for this story: Andrew J. Barden at

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