Bloomberg News

Turkey Central Bank Narrows Rates Corridor for 3rd Month

November 20, 2012

Turkish central bank Governor Erdem Basci narrowed his rates corridor for a third month, leaving the benchmark interest rate unchanged as he balances measures to reduce above-target inflation against those to spur growth.

The monetary policy committee in Ankara lowered the top end of the rates corridor by 50 basis points to 9 percent, the central bank said on its website today, in line with the median estimate of eight economists polled by Bloomberg. The committee held the benchmark one-week repo rate, or the benchmark rate, at 5.75 percent, in line with the forecasts of 10 of 11 economists polled by Bloomberg.

Basci can vary interest rates daily by lending from either the top or bottom end of the corridor as he confronts the region’s fastest inflation rate, a slowing economy and a volatile currency. He’s favored the lower end in recent months, pushing funding costs to record lows after growth slumped to 2.9 percent in the second quarter.

Basci said on Nov. 12 that he may lower the corridor’s floor to deter capital inflows that could cause the lira to appreciate excessively, hurting trade balances. His remarks preceded a decline in the lira against the dollar for the first week in three.

“The central bank has drawn a line and has shown its commitment to act if and when the lira crosses that line,” Yarkin Cebeci, an economist at JP Morgan Chase Bank in Istanbul, said by e-mail. They “opted for the cautious option. While they signaled that they could cut the lower band or even the policy rate if the lira strengthened further, it kept these rates unchanged as the current level of the lira does not pose risks on financial stability.”

Lending Slows

Total lending by Turkish banks has increased 11.4 percent this year, compared with 25 percent a year earlier, according to data released by the banking regulator in Ankara yesterday.

Turkey’s inflation rate dropped to the lowest in 11 months in October, slowing to 7.8 percent from 9.2 percent the previous month. The central bank on Oct. 24 increased its forecast for year-end inflation to 7.4 percent from 6.2 percent, citing higher oil prices and taxes.

The central bank is also preparing to manage an increase in short-term capital inflows after Fitch Ratings on Nov. 5 gave Turkey its first investment-grade rating since 1994, deputy central bank governor Turalay Kenc said in a televised interview with CNBC-e television on Nov. 8.

Lira Concern

The central bank said in today’s decision that the bank may make a “measured cut” in policy rates and the overnight borrowing rate if this is necessary for financial stability.

Moody’s Investors Service, which rates Turkey one level below investment grade, will hold a conference in Istanbul tomorrow. Turkey will have to manage inflows carefully after the upgrade to guard against excessive appreciation in the lira, Finance Minister Mehmet Simsek said in an interview published in Milliyet newspaper today.

The lira has gained 5 percent this year, compared with an 18 percent decline last year, when a rapid expansion in lending helped swell the current-account deficit to about 10 percent of gross domestic product. Bond yields have dropped 476 basis points this year, or 4.76 percentage points, and hit a record low of 6.25 percent as of 11:15 a.m. in Istanbul today before closing the day at 6.30 percent. The lira rose less than 0.1 percent at 5:49 p.m.

The central bank’s decision to cut from the top end while leaving the lower end unchanged should be taken as a sign of caution, Tim Ash, chief emerging market economist at Standard Bank Plc., said in e-mailed comments.

“The message is that it is still a little early to put the foot to the floor on the gas again, when the current account deficit remains large, and financing risks are still considerable. Lets rebuild confidence, gradually by more consistent and less risky policy impulses,” he said.

To contact the reporter on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

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


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