Turkey Unexpectedly Raises Overnight Rate for Second Month

Turkey’s central bank unexpectedly raised its overnight lending rate for a second month, after the lira weakened and inflation accelerated to a 10-month high in July.

The bank raised its overnight rate, the top end of its rates corridor, to 7.75 percent from 7.25 percent. None of the 11 economists in a Bloomberg survey forecast the change. It kept its benchmark one-week repo rate at 4.5 percent, in line with all 13 estimates in a Bloomberg survey. It also left its overnight borrowing rate unchanged at 3.5 percent. Governor Erdem Basci uses the corridor to change the effective interest rate daily by providing funding at varying rates in different amounts.

The lira has weakened 5.1 percent since U.S. Federal Reserve Chairman Ben S. Bernanke said May 22 he may scale back monetary stimulus, threatening a drawback of liquidity that had boosted inflows to emerging markets. The central bank increased interest rates last month for the first time in almost two years to stem the depreciation in currency.

“The central bank is in a reactionary mode since May 22. This is understandable given current global conditions,” Isik Okte, a strategist at state-run Turkiye Halk Bankasi AS (HALKB)’s investment unit in Istanbul, said by e-mail before the decision today. “This is not the time to sit idly and watch.”

The lira has weakened even as Basci raised the effective cost of funding to a one-year high of 6.53 percent on Aug. 15, nearing the limits of his tightening ability under the previous corridor range. The currency has declined by about 1 percent since Basci signaled a tighter policy on July 15, compared with an 8 percent drop in the Brazilian real and a 6 percent drop in the Indonesian rupiah.

Inflation was 8.88 percent in July, compared with the central bank’s target of 5 percent for the end of the year. Inflation will probably slow from August, the bank said in a statement accompanying the decision today.

The lira gained 0.2 percent to 1.9499 against the dollar at 2:10 p.m. in Istanbul. Yields on two-year benchmark notes rose 2 basis points to 9.41 percent, compared with the record low of 4.79 percent on May 17.

To contact the reporter on this story: Onur Ant in Ankara at oant@bloomberg.net

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

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