Turkey’s central bank kept its interest-rate corridor unchanged after a reduction in the top rate last month caused the lira to plunge.
The Ankara-based lender left the benchmark one-week repo rate, the floor of the corridor, at 5.75 percent, matching all 11 forecasts in a Bloomberg survey. The maximum rate on overnight loans was also unchanged at 11.5 percent, the bank said on its website today, in line with predictions by five of six economists.
The central bank’s surprise cut to the ceiling in February led to a drop of as much as 4.5 percent in the lira. The currency’s decline in the past year helped push inflation to a three-year high. Governor Erdem Basci, who says the rates corridor he adopted last year allows him to vary policy almost daily in line with conditions, used that flexibility last week to push borrowing costs higher and bolster the currency.
“Market developments did not allow a narrowing of the corridor,” said Inan Demir, chief economist at Finansbank AS in Istanbul, in a report before the decision. “The lira underperformed most emerging-market peers until Basci reversed his stance.”
The central bank also reduced the amount of liras it lends in regular repo actions, and increased the amount of lira reserves that banks are allowed to hold in gold. Overall, the measures “would raise the weighted average cost of funding,” Istanbul-based lender Turk Ekonomi Bankasi AS (TEBNK) said in an e- mailed note.
The central bank said today that it is “applying additional tightening to prevent developments in short-term financial elements from impacting expectations,” adding that “additional monetary tightening may be repeated as needed.”
Basci said last week that the central bank will maintain a policy of “controlled tightening,” and halted repo auctions at the benchmark rate. The measure pushed funding costs for banks to 9.25 percent from about 7.5 percent a month earlier, according to Finansbank’s estimates.
The lira fell 0.2 percent to 1.7883 per dollar at 6:55 p.m. in Istanbul, extending its one-week rebound to 2 percent. The currency, the worst performer globally in 2011 with an 18 percent drop against the dollar, has gained 5.7 percent this year.
Yields on two-year benchmark bonds fell 6 basis points, or 0.06 percentage point, to 9.48 percent. They were about 9 percent when the central bank cut the rate corridor ceiling last month.
Inflation (TUCPIY) slowed to 10.4 percent in February from 10.6 percent in January, the highest since 2008. The central bank says it expects a slowdown after this month.
Turkish ministers including premier Recep Tayyip Erdogan have pressed for low rates to support the government’s growth target of 4 percent for the $735 billion economy, which grew at about twice that pace last year. The median forecast of ten economists surveyed by Bloomberg is 2.6 percent.
Slower growth in output, credit and prices “support the idea that the additional tightening should be temporary,” Sinan Goksen, head of research at Ekspres Invest brokerage in Istanbul, said in a report today before the decision. “Further global easing is still a possibility and may support lower interest rate environment in Turkey in the period ahead.”
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