Turkish Central Bank Maintains Interest-Rate Corridor

Turkey’s central bank kept its interest-rate corridor unchanged as it seeks to support the lira and slow inflation.

The bank in Ankara left the benchmark one-week repo rate at 5.75 percent, it said on its website today, matching the forecasts of all 11 economists surveyed by Bloomberg. It also kept the maximum rate on overnight loans at 11.5 percent, while allowing banks to hold more of their reserves in gold and foreign currencies.

Central bank Governor Erdem Basci varies interest rates daily within those boundaries to help bring down inflation and defend the currency while maintaining economic growth. The inflation rate declined to 8.3 percent last month from a 3 1/2- year high of 11.1 percent in April, while the lira and government bonds have posted gains this month.

“We feel that the bank is more comfortable nowadays, because petroleum prices continue to decline” and the lira is “relatively stable,” said Ozgur Altug, an economist at BGC Partners in Istanbul, in an e-mailed note. Oil has fallen almost 20 percent this year.

While domestic demand is supportive, “a cautious stance on price movements is required as inflation will stay above targets for some time,” the central bank said in a statement accompanying today’s decision. The year-end goal is 5.5 percent.

Bonds Gain

The lira has gained more than 4 percent this month and was little changed at 1.7929 per dollar at 2:30 p.m. Yields on two- year government bonds have dropped about half a percentage point in the same period and were heading for the lowest level in eight months at 8.92 percent.

The central bank also raised the proportion of reserve requirements that can be held in foreign exchange to 50 percent from 45 percent, while the limit for gold was increased to 25 percent from 20 percent.

The changes will add as much as $2.7 billion to the central bank’s foreign exchange reserves, $2.2 billion to gold reserves and as much as 5.6 billion liras ($3.1 billion) to banks’ lira liquidity, the bank said.

The bank has lent at the lower-end rate of 5.75 percent for the past 13 working days, the longest period since March. That has reduced average funding costs for banks to 8.7 percent yesterday from as high as 10.8 percent in May.

The central bank may seek to bring that rate down toward 8.5 percent, Altug said. It may consider lowering the top end of the rates corridor in two or three months, he said.

To contact the reporters on this story: Mark Bentley in Istanbul at mbentley3@bloomberg.net; Aydan Eksin in Istanbul at aeksin@bloomberg.net.

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

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