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 lower end of the rates corridor, 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.
“In the light of this latest depreciation of the lira through moral suasion, we believe a cut in the lower end has become less relevant,” Cevdet Akcay, chief economist at Yapi & Kredi Bankasi AS, said in an e-mailed note before the decision. The cut to the top end of the corridor is meant to stimulate lending “as commercial loans continue to perform quite poorly,” he said.
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.
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, or 4.76 percentage points, and hit a record low of 6.25 percent as of 11:15 a.m. in Istanbul today.
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 before the decision.
“Boring is good in my mind, after the rollercoaster ride on the monetary policy front in Turkey over the past couple of years,” he said.
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