Bloomberg News

Turkey Central Bank Keeps Rates Unchanged to Counter Inflation

July 19, 2012

Turkey’s central bank kept both ends of its interest-rate corridor unchanged, declining to loosen policy in response to lower-than-expected inflation, signs of an economic slowdown and plunging bond yields.

The bank in Ankara held its benchmark one-week repo rate at 5.75 percent, in line with the forecasts of all eight economists surveyed by Bloomberg. It also kept the top rate for overnight loans at 11.5 percent, upsetting predictions of a cut by banks including Commerzbank AG and DZ Bank AG.

Central Bank Governor Erdem Basci varies rates within the range on a daily basis to balance above-target inflation, a slowing economy and a volatile currency. He has favored the lower end in recent weeks, pushing bank funding costs to a three-month low. Still, inflation at almost double the year-end target limits the bank’s room for cuts.

“Caution now is clearly warranted in order not to be forced to reverse course later,” Tevfik Aksoy, chief economist for the region at Morgan Stanley in London, said in an e-mailed report before today’s announcement. By easing now, the bank may “give a false impression that it is giving up on the ambitious CPI target.”

The bank’s year-end goal is 5 percent. Inflation accelerated to 8.9 percent last month, though it stayed below the expectations of all nine economists surveyed by Bloomberg, helping extend a rally in the bond market.

Inflation Risk Easing

Yields on benchmark two-year lira debt have dropped more than 1.2 percentage points in the past month. The bonds were trading to yield 7.8 percent at 11:30 a.m. in Istanbul today, close to a 10-month low.

Basci said on July 6 that inflation risks are easing as oil prices decline, and that the year-end figure may be closer to the 5 percent target than previously expected.

Those comments, coupled with signs of a slowdown in Turkey’s $800 billion economy, led some economists to predict that the central bank will switch its focus to propping up growth.

Commerzbank forecast a 1 percentage-point cut to the rate- corridor ceiling. It said that diminished concerns about inflation would make the central bank more relaxed about the weakening in the lira that such a move would probably trigger.

The currency, the world’s worst performer in 2011, has gained about 5 percent against the dollar this year. It traded at 1.8036 at midday in Istanbul, little changed from yesterday.

Shrinking Output

Prime Minister Recep Tayyip Erdogan aims for an expansion of 4 percent in the economy this year, almost double the 2.3 percent predicted by the International Monetary Fund.

Turkey’s main export markets in Europe have been hurt by the debt crisis there. Auto production slumped 13 percent in June from a year earlier and the central bank’s manufacturing confidence index slid to a four-month low. Gross domestic product shrank 0.4 percent in the first quarter from the previous one, the first contraction in three years.

Whatever the central bank decides today, in the longer term “the direction of interest rates is to the south,” Istanbul- based brokerage Tera said in an e-mailed report today.

To contact the reporter on this story: Ben Holland in Istanbul at Bholland1@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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