Turkey’s central bank faces challenges in ensuring growth and inflows of foreign capital don’t threaten macroeconomic stability, and the bank’s success will feed into the country’s debt rating assessment, Fitch Ratings said.
“One of the challenges the central bank faces is to reduce inflation and prevent the economy overheating in a challenging policy environment, including large capital inflows and low global interest rates,” Fitch analyst Edward Parker said in an emailed response to Bloomberg questions today from London.
Turkey is among emerging markets concerned that a surge in bank lending and inflows of short term capital may destabilize its economy. Growth was 8.9 percent in the first nine months, four times the rate of Europe. The bank cut the benchmark interest rate by 50 basis points to 6.5 percent on Dec. 16 then raised banks’ reserve requirements the next day in an effort to curb inflows of “hot money” and stop a possible credit bubble.
The lira has fallen to a five-month low and two-year bond yields rose from a record 7.25 percent since the central bank took the measures. The lira gained 0.3 percent to 1.5546 per dollar at 5:30 p.m. and yields climbed 1 basis point to 7.40 percent.
There is some uncertainty about whether Turkey can grow robustly without generating significant imbalances that pose a threat to macroeconomic stability, Parker said. Turkey also has “a history of relatively high and volatile inflation,” he said.
There should be no “excessive comfort” about interest rates remaining low for a long period, the International Monetary Fund said on Dec. 17. The central bank may need to increase rates should the measures it takes not protect the credibility of the inflation target, the IMF said.
Inflation in Turkey slowed to 7.3 percent in November from 8.6 percent the previous month. The bank’s inflation goal for this year is 6.5 percent and 5.5 percent for 2011.
Steps made so far are “showing an effect” and the central bank is ready to use all tools at its disposal to help the economy and financial system, governor Durmus Yilmaz said at a news conference in Ankara today. Steps may include increasing banks’ reserve requirement for foreign currency deposits and possibly selling dollars as well as buying them, he said.