Turkey Bank Cuts Upper Lending Rates to Spur Growth

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Turkish Central Bank Cuts Upper Lending Rates, Yields Slide
The central bank of Turkey stands in Ankara. Photographer: Kerem Uzel/Bloomberg

Turkey’s central bank unexpectedly cut the maximum interest rate at which it lends to banks, saying it was taking into account monetary easing in other economies. Bond yields fell to a four-month low.

The bank lowered the maximum rate on overnight loans to 11.5 percent from 12.5 percent and reduced its 12 percent repo rate for market-making lenders to 11 percent. The one-week repo rate, the floor of the corridor within which Erdem Basci, governor of the Central Bank of the Republic of Turkey, varies lending rates, was kept at 5.75 percent, as expected by all nine economists surveyed by Bloomberg.

After almost doubling the effective funding rate to 12.5 percent in October to stem a currency deterioration and quickening inflation, Basci, 45, started reducing borrowing costs in January. The central bank has been lending at about 7.5 percent since mid-January. The cheaper money supports government efforts to keep the economy growing amid a slowdown in Europe, Turkey’s main export market.

“The unexpected cut of the lending rate is a sign of relaxation of monetary policy,” Murat Toprak, chief currency strategist for Europe, the Middle East and Africa at HSBC Holdings Plc in London, said in e-mailed comments.

Lower rates would support Prime Minister Recep Tayyip Erdogan’s goal of achieving at least 4 percent growth this year for Turkey’s $735 billion economy, after the fastest expansion behind China among major economies last year. Economists expect growth to slow to 2.7 percent in 2012, according to the median of seven estimates compiled by Bloomberg.

‘Why Touch It’

Yields on two-year benchmark bonds fell 16 basis points, or 0.16 percentage point, to 8.98 percent at 3:56 p.m. in Istanbul, heading for the lowest level since October. The lira fell the most this year, declining 0.62 percent to 1.7532 per dollar. The benchmark ISE-100 stock index dropped 362.97 points, or 0.59 percent, to 61086.10.

“I didn’t expect the cut and, to be honest, don’t see much sense here,” said Viktor Szabo, who helps manage $7 billion in emerging-market debt at Aberdeen Asset Management in London. “The central bank created a flexible mechanism which allows it to fine-tune short-term interest rates, so why touch it?”

Basci may be seeking to send a message to the market that the central bank wants to see lower rates, Szabo said. Alternatively, the governor may be signaling that he is certain that the inflation rate is coming down, or that he is “fully confident” there will be no “big” surprises from the euro zone, he said.

Less Hawkish

Inflation accelerated to 10.6 percent in January. Basci forecast last month that it will slow to 6.5 percent this year, still above the bank’s target of 5 percent. The rate will fall to 6.87 percent in 12 months, according to the average estimate of more than 80 economists and executives in a fortnightly report published by the central bank on Feb. 8.

The lira’s rebound from an 18 percent slump in 2011 may help rein in prices. Basci spent about $18 billion of central bank reserves between July and January and also raised bank borrowing costs and cut reserve requirements to prop up the currency.

“The improvement in inflation prospects and especially decisions taken toward increasing global liquidity are stated as the main reasons behind the decision to narrow the interest rate corridor,” said Yarkin Cebeci, an economist for JPMorgan Chase & Co. in Istanbul. “The language is surely less hawkish.”

‘Cautious’ Policy

The central bank said it will continue with a “cautious monetary policy stance for a while longer to meet medium-term inflation targets. The monetary policy committee decided to cut the ceiling for its lending rate due to monetary-easing decisions worldwide.

The European Central Bank pumped a record 489 billion euros ($643 billion) into the euro region in December to ward off a funding squeeze caused by the sovereign debt crisis. The Federal Reserve kept the option open for a third round of bond purchases after its January meeting and pledged to keep its benchmark interest rate at a record low of about zero percent until late 2014.

Depending on global conditions the central bank “could continue narrowing the interest rate corridor by cutting the overnight lending rate further in the coming months,” said Cebeci, who had forecast a 20 percent chance of a reduction in the overnight rate before today’s decision.

European Crisis

Greece reached an agreement with its private creditors overnight, securing the biggest sovereign restructuring in its history and paving the way for a second bailout of 130 billion euros from European governments. Turkey, whose exports climbed to a record $135 billion last year, sells almost half of its good to the European Union.

Steps to curb the Greek-led euro-zone crisis and expansive monetary policies by the ECB and the Fed trumped last year’s concerns about Turkey’s ability to finance its current-account deficit, which narrowed in the last two months of 2012 after a credit-fueled boom led to a surge in imports that pushed the 12-month trade gap to a record $78.6 billion in October. The deficit is still about 10 percent of economic output.

Investors poured $13.7 billion into Turkish government debt and equities this year compared with a decline of $2.7 billion in the first five weeks of 2011, central bank data show.

“The CBT seems to be content with the recent capital inflows that smoothen financial and price stability concerns,” Mehmet Besimoglu, chief economist at Oyak Investments in Istanbul, said in an e-mailed report.

The “accommodative stance” in Basci’s monetary policy is likely to continue despite concerns about inflation and the sustainability of foreign investments, Besimoglu said. “As long as risk appetite continues, the downward shift in interest rates is quite ‘consumption-friendly.’ Thus, it can be argued that this signals more cuts in the coming period if liquidity prevails.”

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