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 corridor 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 to the corridor, which could be seen as an indication it was dropping its commitment to fighting inflation.
“The central bank has sufficient room to ease the policy without changing the rate corridor,” Aurelija Augulyte, an analyst at Nordea Bank AB in Copenhagen, said in e-mailed comments today. “We expect gradual downward adjustment of inflation from here -- it will likely remain sticky around eight percent in the coming months, but still above 6.5 perent at the end of the year.”
The bank’s year-end inflation estimate is 6.5 percent, higher than its official target of 5 percent. While inflation accelerated to 8.9 percent last month, 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 7.73 percent at 4:30 p.m. in Istanbul today, the lowest on a closing basis since Jan. 25, 2011.
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 would switch its focus to reinforcing growth today.
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 central bank said today that was adjusting the amount of money it may lend each day at its lowest rate to between 500 million liras and 6.5 billion liras, expanding the range from an earlier window of between 1 billion liras and 5 billion liras. That gives Basci more flexibility to adjust policy in response to varying goals and external factors.
“The central bank did the right thing” in not adjusting its rates corridor, Tevfik Aksoy, chief economist for the region at Morgan Stanley in London, said in e-mailed comments after today’s announcement. “A change in the overnight rate corridor would be too early and would give a wrong signal” on its commitment to slow inflation.
The lira, the world’s worst performer in 2011, has gained about 5 percent against the dollar this year. It fell 0.2 percent to 1.8056 per dollar at 4:20 p.m. in Istanbul.
Prime Minister Recep Tayyip Erdogan is targeting economic growth of 4 percent 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.
Turkey’s economy expanded 8.5 percent last year on the back of a credit-driven boom that also swelled the current-account deficit to about 10 percent of gross domestic product as Turkish consumers bought more imported goods.
Concerns about the current-account deficit may ultimately also push the bank to cut rates to dissuade excessive capital inflows into the country, according to Augulyte at Nordea.
“The current environment of continued easing from the Western world and declining volatilities may provide massive capital flows to emerging markets,” she said. That may prod the central bank to cut rates “to prevent the lira from strengthening too much.”
Regardless of today’s decision, in the longer term “the direction of interest rates is to the south,” Istanbul-based brokerage Tera Brokers said in an e-mailed report.
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