Turkish Central Bank Cuts Upper Lending Rates, Yields Slide
February 29, 2012, 4:50 AM ESTBy Emre Peker
(Updates with inflation in fifth paragraph.)
Feb. 21 (Bloomberg) -- Turkey’s central bank unexpectedly cut the maximum interest rate at which it lends to banks, saying it was taking into account monetary easing in other economies. Bond yields fell to a four-month low.
The bank lowered the maximum rate on overnight loans to 11.5 percent from 12.5 percent and reduced its 12 percent lending rate to 11 percent. The one-week repo rate, the floor of the corridor within which Erdem Basci, governor of the Central Bank of the Republic of Turkey, varies lending rates, was kept at 5.75 percent, as expected by all nine economists surveyed by Bloomberg.
After almost doubling the effective funding rate to 12.5 percent in October to stem a currency deterioration and quickening inflation, Basci, 45, started reducing borrowing costs in January. The central bank has been lending at about 7.5 percent since mid-January. The cheaper money supports government efforts to keep the economy growing amid a slowdown in Europe, Turkey’s main export market.
“The unexpected cut of the lending rate is a sign of relaxation of monetary policy,” Murat Toprak, chief currency strategist for Europe, the Middle East and Africa at HSBC Holdings Plc in London, said in e-mailed comments.
Lower rates would support Prime Minister Recep Tayyip Erdogan’s goal of achieving at least 4 percent growth this year for Turkey’s $735 billion economy, after the fastest expansion behind China among major economies last year. Economists expect growth to slow to 2.7 percent in 2012, according to the median of seven estimates compiled by Bloomberg.
‘Why Touch It’
Yields on two-year benchmark bonds fell 8 basis points, or 0.08 percentage point, to 9.06 percent at 2:29 p.m. in Istanbul, heading for the lowest level since October. The lira fell 0.62 percent to 1.7532 per dollar. The benchmark ISE-100 stock index dropped 594.52 points, or 0.97 percent, to 60854.55.
“I didn’t expect the cut and, to be honest, don’t see much sense here,” said Viktor Szabo, who helps manage $7 billion in emerging-market debt at Aberdeen Asset Management in London. “The central bank created a flexible mechanism which allows it to fine-tune short-term interest rates, so why touch it?”
Basci may be seeking to send a message to the market that the central bank wants to see lower rates, Szabo said. Alternatively, the governor may be signaling that he is certain that the inflation rate is coming down, or that he is “fully confident” there will be no “big” surprises from the euro zone, he said.
Less Hawkish
Inflation accelerated to 10.6 percent in January. Basci forecast last month that it will slow to 6.5 percent this year, still above the bank’s target of 5 percent.
The lira’s rebound from an 18 percent slump in 2011 may help rein in prices. Basci spent about $18 billion of central bank reserves between July and January and also raised bank borrowing costs and cut reserve requirements to prop up the currency.
“The improvement in inflation prospects and especially decisions taken toward increasing global liquidity are stated as the main reasons behind the decision to narrow the interest rate corridor,” said Yarkin Cebeci, an economist for JPMorgan Chase & Co. in Istanbul. “The language is surely less hawkish.”
The central bank said in today’s statement that it decided to cut the ceiling for its lending rate due to monetary-easing decisions worldwide.
--Editors: Andrew J. Barden, Digby Lidstone.
To contact the reporter on this story: Emre Peker in Ankara at epeker2@bloomberg.net
To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net
