Bloomberg News

Turkey Central Bank May Narrow Rate Corridor; Yields Fall

August 16, 2012

Turkey’s central bank said it may narrow its so-called interest-rate corridor, prompting the biggest drop in yields on two-year lira bonds in two weeks.

The Ankara-based bank said it may narrow the corridor gradually after deciding today not to loosen policy to stimulate growth while rising oil and commodity prices threaten inflation (TUCPIY) targets worldwide. The bank held its benchmark one-week repo rate at 5.75 percent, in line with the forecasts of all nine economists surveyed by Bloomberg, and kept the top rate for overnight loans at 11.5 percent.

Central Bank Governor Erdem Basci varies interest rates within the corridor on a daily basis to balance above-target inflation, a slowing economy and a currency that depreciated more than any other major world currency last year. Predictions for a rate cut fell in August, with one-year interest rate swaps rising 44 basis points in the month, as the price of Brent crude surged above $116 from $104.92 at the close on July 31.

“The central bank has underlined that the corridor will be narrowed in the coming period,” Gizem Oztok, an economist at Garanti Securities in Istanbul, said in e-mailed comments. “Although this action was expected, we’re seeing a loosening in bond yields because it was stated so openly. Rates could continue to fall toward 7.7 percent.”

Yields on benchmark two-year lira bonds plunged the most since Aug. 3, decreasing 14 basis points, or 0.15 percentage point, to 7.80 percent at 3:50 p.m. in Istanbul. The yield was 7.49 percent on Aug. 3, the lowest this year. The lira was little changed, gaining less than 0.1 percent to 1.7980.,

A cut of 50 basis points to the top of the corridor at the bank’s next meeting in September is likely, Oztok said.


Inflation will probably remain above target “for a while longer,” the bank said in a statement accompanying its rates decision. Its year-end inflation estimate is 6.2 percent, higher than the official target of 5 percent. Inflation accelerated to 9.1 percent in July, though that was down from a 3 1/2-year high of 11.1 percent in April, according to data from the state statistics institute in Ankara.

Basci said on July 6 that inflation risks were easing as oil prices declined, and that the year-end inflation figure may be closer to the 5 percent target than previously expected. The price of Brent crude rose amid rising tensions over Syria and speculation of possible Israeli military action against Iran.

Economic Slowdown

Higher inflation hinders Basci’s ability to use monetary policy to jump-start Turkey’s nearly $800 billion economy, which has shown signs of stalling. The economy contracted on a quarterly basis in the first quarter for the first time since 2009, and loan growth in July slumped to 17 percent, the lowest in two years. Turkey was the world’s third-fastest major economy last year on the back of a credit boom that saw loans growing by 40 percent in October.

Turkey imports more than 70 percent of its energy and Iran is nation’s biggest crude supplier, according to the Ankara-based energy market regulator. Turkey’s energy bill will probably rise to $60 billion this year from $54 billion last year, Finance Minister Mehmet Simsek said on social media website Twitter yesterday.

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 could miss the target as the crisis in Europe, Turkey’s largest trading partner, threatens growth, Deputy Prime Minister Ali Babacan said in an interview with NTV news on Aug. 9.

The central bank increased the proportion of required lira reserves lenders can keep in foreign exchange to 60 percent from 55 percent and the percentage that can be kept in gold to 30 percent from 25 percent. The changes may add as much as $7.3 billion to the bank’s foreign exchange reserves and supply up to 5.6 billion liras of liquidity to the market, it said.

To contact the reporter on this story: Benjamin Harvey in Istanbul at

To contact the editor responsible for this story: Gavin Serkin at

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