Turkey Lifts Overnight Rate, Drops Easing Bias to Help Lira

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Oct. 20 (Bloomberg) -- Turkey’s central bank raised the overnight lending rate and dropped a reference to reducing its benchmark rate in future, boosting the lira.

The central bank in Ankara increased the overnight rate to 12.5 percent from 9 percent and kept its key one-week repo rate at 5.75 percent, it said in an e-mailed statement today. That matched the forecasts of all 14 economists surveyed by Bloomberg.

Governor Erdem Basci is battling to end the slump in the lira that he helped initiate. Basci cut the benchmark rate by half a point on Aug. 4, concerned that the European debt crisis will undermine economic growth. The lira has fallen 6.6 percent against the dollar since then, adding to a surge in inflation from tax increases. The bank spent more than $1 billion yesterday trying to arrest the currency’s fall.

“The bank is trying to make shorting the lira more expensive by sharply increasing lending rates,” Inan Demir, chief economist for Finansbank AS in Istanbul, said by e-mail. “Interbank rates could settle significantly above the policy rate, which should be supportive of the lira but negative for bonds.”

Lira Gains

The lira rose 0.8 percent against the dollar at the 5:30 p.m. close in Istanbul. The bank will release minutes of its interest-rate meeting within five working days.

The central bank today dropped wording from earlier statements that it may need to ease monetary policy. It said today it’s now ready to “take the necessary policy action to ensure stability on domestic markets.”

“The bank has switched to a more hawkish stance,” Haluk Burumcekci, chief economist at EFG Istanbul Securities, said in an e-mail. It is “the least they could do. We continue to believe the inflation outlook and the lira warrant a much tighter stance.”

The bank has used up about 10 percent of its foreign currency reserves since July selling dollars to stem the lira’s decline. It intervened directly in markets on Oct. 18 for the first time since 2006, hours after selling $750 million of dollars in an auction.

Reserves stood at $85.1 billion on Oct. 7, according to central bank data, equivalent to the country’s short-term external debt as of June.

Global Bias

Brazil and Israel followed Turkey’s August interest rate cut to help support their economies as global growth slowed.

Turkey’s current-account deficit, equal to about 10 percent of gross domestic product, and the European debt crisis have dented investor confidence. The lira has slid 17 percent against the dollar this year, the second-worst performer among 25 emerging-market currencies tracked by Bloomberg, after South Africa’s rand. The lira fell to a record low of 1.9096 per dollar on Oct. 4.

The currency’s decline has boosted imported costs at the same time that the government raised taxes on cars, phones, alcohol and tobacco this month. Inflation, which was at 6.2 percent in September, is likely to “significantly” exceed this year’s 5.5 percent target, the central bank said today. The bank “will not tolerate” any adverse impact on the inflation outlook, it said.

The International Monetary Fund welcomed the higher lending rates “as a way to preserve the credibility of the authorities’ inflation targets,” fund spokesman Gerry Rice told reporters in Washington today.

Yields on benchmark two-year lira bonds rose to 9.14 percent today, from about 8 percent at the start of September, on expectations of higher inflation and rate increases.

Turkey’s economy is slowing after expanding 8.8 percent in the second quarter from a year earlier. The government expects growth of 7.5 percent this year and 4 percent in 2012. The International Monetary Fund’s forecast for 2012 is 2.5 percent.

To contact the reporters on this story: Mark Bentley in Istanbul at mbentley3@bloomberg.net; Steve Bryant in Ankara at sbryant5@bloomberg.net

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