Turkish central bank Governor Erdem Basci said he’s ready to cut interest rates as early as this month to prevent the lira appreciating after the country’s debt was raised to investment grade.
The central bank is monitoring its index of the lira’s real exchange rate, measured against the currencies of its main trade partners, Basci told the state-run Anatolia news agency in a televised interview. The index rose to 117.4 last month from 116.3 in September and Basci said it currently stands at 119.
“If the lira becomes overvalued we will lose our advantage with respect to the external balance,” Basci said. An index level of 120 would suggest that is happening, and “we may respond in the short term,” while if the measure passes 125 then “a stronger policy response” would be needed, he said.
Basci last year adopted an interest-rate corridor that allows him to adjust rates daily. He has responded to slowing economic growth this year by bringing the band’s top end down to 9.5 percent, and keeping bank borrowing costs near the lower limit of 5.75 percent in recent months.
“In addition to an expected cut at the upper band of the interest-rate corridor, we now think there is a higher probability of a measured cut at the lower band” of between 25 and 50 basis points in this month’s rates meeting on Nov. 20, Haluk Burumcekci, chief economist at EFG Istanbul Securities, said in an e-mailed note. The top end may be cut by 100 basis points, he said.
The lira weakened 0.6 percent to 1.8002 per dollar at 2:51 p.m. in Istanbul. Basci forecast that the currency would appreciate by between 3 percent and 4 percent in the coming year. Yields on benchmark two-year lira bonds extended their record low, falling 16 basis points to 6.41 percent.
Turkey won its first investment-grade rating in almost two decades from Fitch Ratings last week, prompting predictions of an increased flow of international investment to the country, which Basci echoed.
Turkey’s economy grew 2.9 percent in the second quarter, the slowest pace since 2009’s recession. After a further slowdown in the third quarter, it’s set to rebound in the current period and the first half of 2013, according to a Bloomberg survey.
Credit growth shouldn’t be allowed to exceed a 15 percent annual pace, Basci said. If policy tightening is needed, it can be applied through reserve requirement ratios, he said.
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