Turkey Leaves Benchmark Rate Unchanged for 12th Month

Turkey’s central bank left its benchmark interest rate unchanged, marking a year of record-low borrowing costs that have fueled a surge in economic growth.

The central bank in Ankara kept its one-week repo lending rate at 7 percent, according to an e-mailed statement today. That matched the estimate of all 13 economists in a Bloomberg survey. It also slashed its overnight borrowing rate to 1.75 percent from 5.75 percent, saying it wants to encourage banks to lend to one another at longer maturities rather than depositing cash with the central bank. Minutes of the meeting are due to be released within eight working days.

Governor Durmus Yilmaz said on Oct. 26 that he will probably keep rates on hold until the last quarter of next year because core indicators show that inflation is likely to slow even as the economy expands. Gross domestic product grew about 11 percent annually in the first half and the government forecasts expansion of 6.8 percent for the full year.

There are “no policy rate hikes on the horizon,” Tevfik Aksoy, Morgan Stanley & Co.’s London-based chief economist for Turkey, the Middle East and North Africa, said in an e-mailed report.

The lira traded at 1.4363 per dollar at 7:30 p.m. local time, little changed from before the central bank’s announcement. The Turkish currency has gained about 4 percent against the dollar and 9 percent against the euro this year.

Core Inflation

Inflation slowed to 8.6 percent in October from 9.2 percent a month earlier, and core inflation excluding food, energy and non-alcoholic drinks, dropped to 2.5 percent. Yilmaz aims to bring inflation down to 5.5 percent by the end of next year and the bank said today that price developments are in line with those goals.

Expectations for inflation over the next year rose this month, signaling concerns that the target won’t be met. The average forecast increased to 7.19 percent from 7.13 percent in the central bank’s biweekly survey of economists and executives, released on Nov. 8.

Consumer loans have risen by an average of 0.8 percent a week since January. That has helped drive profits at lenders such as Turkiye Garanti Bankasi AS, whose shares have gained 39 percent this year while the benchmark ISE-100 stock index added 33 percent.

There is pressure on Yilmaz to take other steps that will “remove concern about the bank falling behind the curve,” even as rates stay on hold, Aksoy said.

Reserve Requirement

The central bank in September increased the level of lira reserves banks must deposit to 5.5 percent, partially reversing a reduction in December 2008 to provide emergency liquidity during the global financial crisis.

The bank plans to raise reserve requirements again before the end of the year, Yilmaz said Nov. 1. It should increase them to above the pre-crisis level, Aksoy said.

The bank also said in the statement accompanying today’s decision that increasing capital inflows to Turkey, combined with weak demand for Turkish goods abroad, “pose a risk to the current-account balance and financial stability.”

The country had a current account deficit of $37.1 billion in the 12 months through September, as the lira’s gains curbed exports and economic growth fueled demand for imported goods.

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