Turkish Bank Raises Reserve Requirements, Warns on Inflation
Turkey’s new central bank Governor, Erdem Basci, raised reserve requirements for banks, saying they’re needed to curb domestic growth as inflation is set to accelerate, and held the benchmark interest rate unchanged.
The central bank in Ankara kept its one-week repo lending rate at a record low of 6.25 percent, according to an e-mailed statement today. That matched the forecast of all 11 economists surveyed by Bloomberg. The bank also raised the reserve requirement for short-term lira deposits to 16 percent from 15 percent, the fourth increase in six months, and for foreign currency deposits to 12 percent from 11 percent.
Basci, who took over at the bank on April 19, is trying to slow economic growth without raising the benchmark rate and drawing in short-term capital. Since January, the bank has held the repo rate at the lowest since the country began inflation targeting in 2002, and raised the reserves banks must set aside, reducing money available to lend to the domestic economy.
The additional increase this month is “a very decisive move and timely,” Tevfik Aksoy, London-based head of emerging market economics for the region at Morgan Stanley, said in a telephone interview. “Basci is saying ‘I’m not new to this game.’”
Yields on benchmark two-year lira bonds fell 29 basis points, or 0.29 percentage points, to 8.33 percent at the 5:30 p.m. close of trade in Istanbul. The main ISE National 100 share index rose 0.8 percent to 68,565.60.
‘Limited Sales’
After today’s decision “ there will probably be no change in the policy mix until the elections,” said Ugursel Onder, fixed-income analyst at Is Investment Securities, said in e- mailed comments.
Prime Minister Recep Tayyip Erdogan, who proposed Basci for the central bank job, is campaigning for a third term in office in June 12 parliamentary elections. During his campaign, he said he aims to triple gross domestic product in 12 years.
Basci, a 44-year-old school friend of Deputy Prime Minister Ali Babacan, inherits an inflation rate of 4 percent, the lowest in four decades, and an economy that expanded 8.9 percent last year. He’s worked at the bank since 2003 and was a major architect of the mix of low rates and higher reserve requirements.
The pace of growth is now “more moderate” the bank said today. Inflation will accelerate and is likely to end the year above the bank’s target of 5.5 percent, the statement said.
‘Closely Monitor’
The bank will “closely monitor the tightening impact of the policy mix and may add additional measures if needed,” the statements said.
Basci says the bank’s mix of low rates and high reserves is starting to slow loan growth and narrow the current-account deficit, according to a presentation he delivered in Washington that was posted on the bank’s website April 16.
The economic expansion is attracting imports of raw materials and consumer goods. The cumulative current-account gap for the 12 months through February was $54.8 billion, or about 7 percent of estimated gross domestic product, the bank said April 11. It was the largest 12-month deficit on record. The government’s medium-term plans forecast a gap of $42.2 billion, or 5.4 percent of GDP, this year.
The bank last month increased reserve requirements for one- month deposits to 15 percent from 10 percent, sending bond yields up the most in 16 months as banks sold assets to meet the new obligations.
The higher reserves will damage bank earnings, partly because the central bank doesn’t pay interest on the money. The index of banking shares, including lenders such as Akbank TAS, part-owned by Citigroup Inc., has fallen about 2 percent this year, while the main ISE National 100 index (XU100) gained 4 percent.
To contact the reporter on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net;
To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.
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