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Turkey Cuts Top End of Interest-Rate Corridor

Turkey’s central bank cut the top end of its interest-rate corridor for a second month amid mounting calls from businesses for lower borrowing costs as the economy slows.

The bank in Ankara reduced its overnight lending rate by half a percentage point to 9.5 percent, according to its website. The figure was in line with the median estimate of seven economists surveyed by Bloomberg. The bank held its benchmark one-week repo rate at 5.75 percent, in line with all forecasts in the survey. Last month, the bank cut the ceiling from 11.5 percent to 10 percent.

Central bank Governor Erdem Basci can vary rates within the corridor on a daily basis to balance above-target inflation, a slowing economy and moves in the currency. Economic growth eased to 2.9 percent in the second quarter, the lowest since the recession in 2009. That has encouraged Basci to favor the lower end of the range in recent weeks, pushing the average weighted cost of bank funding down to the lowest level this year at 5.8 percent, from almost 12 percent in January.

“They still have a dovish bias as their focus turned to growth,” Gaelle Blanchard Senior Emerging Markets Strategist at Societe General SA (GLE), said today in e-mailed comments from London. “But they will keep a cautious stance on inflation and will not cut the benchmark repo rate before inflation moves towards the target.”

Inflation Expectations

Annual inflation was 9.2 percent last month, compared with a year-end target of 5 percent.

The central bank said it expected slower inflation “to become more evident during the last quarter of the year.”

Given expectations of slower inflation, Blanchard said, the bank “will probably continue to cut the overnight lending rate gradually.”

Yields on benchmark two-year lira bonds have dropped about 2 percentage points since June, and traded at 7.36 percent at the close of the market, close to a 21-month low. The lira was little changed at 1.7987.

The government this month forecast that the economy will grow 3.2 percent this year, less than its initial 4 percent target.

To contact the reporter on this story: David Neylan in Ankara at dneylan1@Bloomberg.net

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

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