Basci Tightens Turkish Banks’ Access to Credit

Photographer: Goh Seng Chong/Bloomberg

Governor Erdem Basci revised his year-end consumer-price inflation forecast to 6.8 percent on Oct. 31, from 6.2 percent in July, citing a weakening lira. Close

Governor Erdem Basci revised his year-end consumer-price inflation forecast to 6.8... Read More

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Photographer: Goh Seng Chong/Bloomberg

Governor Erdem Basci revised his year-end consumer-price inflation forecast to 6.8 percent on Oct. 31, from 6.2 percent in July, citing a weakening lira.

Turkey’s central bank tightened access to credit in a bid to contain exchange-rate volatility and curb inflation, which it said may stay above its target for “some time.”

The bank in Ankara decided to stop monthly repurchase auctions to strengthen its “cautious stance and reduce the volatility of short-term money market rates,” according to a statement on its website. Policy makers also kept the one-week repo rate at 4.5 percent, as expected by all 10 economists surveyed by Bloomberg. They maintained the overnight lending and borrowing rates, the upper and lower ends of the interest-rate corridor, at 7.75 percent and 3.5 percent.

The move to stop the monthly auctions means that the bank, led by Governor Erdem Basci, will only provide money through overnight lending and weekly repo channels. This could stabilize interbank rates and cost of central bank lending around 7.75 percent, said Ibrahim Aksoy, chief economist at Gedik Investment in Istanbul. The weighted average cost of central bank funding to banks rose 26 basis points to 6.6 percent yesterday.

“This is positive for the lira,” Aksoy said by phone. “It’s also an indication of what the central bank might do in the future. It may cut funding through one-week repo completely, which would bring the cost of lending automatically to 7.75 percent.”

Interbank Rates

The lira strengthened 0.5 percent to 2.0119 per dollar at 4:08 p.m. in Istanbul, its highest level since Oct. 31. The yield on two-year lira notes rose 10 basis points, or 0.1 percentage point, to 8.78 percent.

Banks will use the overnight lending facility more heavily as the 10 billion lira cap on one-week repo auctions won’t cover their financing needs, Burgan economists Haluk Burumcekci and Asli Savranoglu Seren said in an e-mailed note after the decision.

“As a result, interbank rates, which currently fluctuate within the 6.75 percent to 7.75 percent band, will gradually converge to the upper bound of the range, namely 7.75 percent,” they said. The average interbank rate since the central bank’s Oct. 23 meeting was around 7.3 percent, they said.

Basci pledged on Sept. 24 not to increase the benchmark repo rate unless the two-year inflation outlook worsens. He revised his year-end consumer-price inflation forecast to 6.8 percent on Oct. 31, from 6.2 percent in July, citing a weakening lira. After a high-than-expected rate of 7.7 percent was announced for October, the governor said that a correction in some food prices in the remainder of the year may slow inflation toward the bank’s forecast.

“Inflation indicators are likely to hover above the inflation target for some time due to the exchange rate volatility observed during the recent months,” the central bank said today.

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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