Bloomberg News

Turkey Central Bank Tightens Policy as Inflation Accelerates

January 02, 2012

Jan. 2 (Bloomberg) -- Turkey’s central bank said it’s squeezing lira liquidity to combat price rises that may push year-end inflation above 10 percent for the first time since 2008.

Annual consumer price inflation is expected “a little above 10 percent” when it’s announced at 10 a.m. in Ankara tomorrow, the bank said in an e-mailed statement today. Inflation will accelerate to 10.1 percent from 9.5 percent in November, according to the median estimate of seven economists in a Bloomberg survey.

Inflation has surged from 4.3 percent when Erdem Basci took over as central bank governor in April. Basci raised bank borrowing costs in October, and has applied “additional tightening” since Dec. 29 to stabilize a currency that fell 18 percent last year, driving up import costs.

“The bank is clearly uncomfortable with both the exchange rate and the level of credit growth,” Inan Demir, chief economist for Finansbank AS in Istanbul, said by telephone. “By tightening lira liquidity it can slow credit growth and support the exchange rate.”

The bank sold dollars on the market for a second trading day today. It’s also restricted the funding it provides banks at the benchmark interest rate of 5.75 percent, forcing lenders to borrow at up to 12.5 percent.

The lira, along with South Africa’s rand, was the biggest decliner last year among emerging market currencies tracked by Bloomberg. Its drop added as much as four percentage points to inflation in 2011, Basci said on Dec. 27.

‘Effective and Temporary’

Basci hasn’t changed the benchmark rate since he cut it by half a percentage point in August. Adjusting rates through market operations and sales of foreign gives the bank the agility it needs to respond to rapid changes in capital flows because of the European sovereign debt crisis, he said.

It’s essential the additional tightening be “strong, effective and temporary,” the bank said in an e-mail today. The duration depends on the speed of the correction in factors that affect inflation, it said.

The central bank is working to achieve a “soft landing” from gross domestic product growth of 8.2 percent annually in the third quarter, Basci said Dec. 12. The pace of growth was exceeded only by China among the Group of 20 major economies in the period.

Annual credit expansion slowed to 31 percent in the week to Dec. 23, from 32 percent a week earlier, the bank regulator said today. The central bank has said it wants to see loans growing at about 25 percent.

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

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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