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Turkey Bank Keeps Rates Corridor, Adds to One-Month Repo

Turkey’s central bank maintained the corridor within which it varies interest rates daily and offered banks increased longer-term financing at a higher rate.

The bank held the one-week repo rate, the floor of the corridor, at 5.75 percent, as expected by all 11 economists surveyed by Bloomberg. It also kept the ceiling at 12.5 percent. The Ankara-based bank announced the decision on its website today and will release minutes of the monetary policy committee’s meeting within five working days.

Since October, Governor Erdem Basci has said he would vary bank borrowing costs on a daily basis within that corridor. Mostly he has kept the costs at the top of the range, saying tighter policy is needed to stop a decline in the lira that’s driving inflation. Today he reaffirmed the policy and also almost doubled the amount of one-month funding he auctions to banks, allowing them more dependable financing.

That “will probably push up costs a bit but more importantly it offers protection against fluctuations,” Yarkin Cebeci, economist for JPMorgan Chase & Co. in Istanbul, said by phone. “The bank has seen the improvement globally and this is a sign of normalization.”

The bank will offer 20 billion liras a month through the one-month facility, up from 12 billion, it said today. Rates in the auctions of one-month funding are generally higher than shorter-term repos.

Preserving Flexibility

A “tight monetary stance should be maintained for a while in order to keep the inflation outlook consistent with the medium-term targets,” the bank said today. “Given the prevailing uncertainties regarding the global economy it would be appropriate to preserve the flexibility of the monetary policy.”

Basci has focused on stabilizing the lira because its fall last year helped drive inflation to 10.5 percent in December, almost double the bank’s 5.5 percent target. The currency has gained 3.2 percent this year and the bank said it’s stopping daily sales of $50 million from tomorrow.

“The regular sales were about smoothing volatility and the exchange rate has stabilized now,” Ozan Gaziturk, economist for Sekerbank TAS in Istanbul, said by phone.

The bank is also conserving foreign-currency reserves that declined to $77.2 billion in the week ended Jan. 13, equivalent to less than four months of imports. Intraday sales of dollars when they’re needed are more effective than regular auctions, it said today.

Bond Yields

The currency was 0.7 percent weaker at 1.8301 per dollar after today’s announcement. Yields on two-year lira bonds rose 10 basis points, or 0.1 percentage point, to 10.40 percent.

The lira depreciated 18 percent against the dollar last year, the most among emerging-market currencies tracked by Bloomberg. The currency will gain this year, Basci said Jan. 6.

Basci is keeping rates tight even as Israel and Brazil cut borrowing costs this month to protect their economies against the impact of the European debt crisis. Turkey’s economy expanded 8.2 percent annually in the third quarter and Basci says his goal is a “soft landing” from high rates of growth.

Inflation accelerated to 10.5 percent in December from 4.9 percent at the start of 2011. While the rate may rise further in the coming months, it will slow toward the 5 percent end-2012 goal later in the year, Basci said Jan. 6.

‘Closely Watching’

The expectation for inflation in 12 months rose to 6.91 percent from 6.85 percent in the bank’s latest survey of economists and executives, released on Jan. 20. The bank is “closely watching” how inflation expectations behave, it said after the last rates meeting on Dec. 22.

The lira has weakened on concern that Turkey may struggle to finance its current-account deficit. The gap narrowed in November for the first time in two years, bringing the cumulative 12-month total to $77.8 billion, still equivalent to about 10 percent of gross domestic product.

Basci argues his tightening will help slow the credit growth that’s driving imports of goods and raw materials.

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