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Turkish Central Bank May Leave Rate-Corridor Unchanged

Turkey’s central bank is forecast to leave its interest-rate corridor of varying borrowing costs unchanged to support the lira and slow inflation after a surprise cut to the ceiling last month.

The Monetary Policy Committee, which announces its decision at 2 p.m. in Ankara tomorrow, will leave the benchmark one-week repo rate at 5.75 percent, according to all 11 economists surveyed by Bloomberg. The central bank won’t change the maximum rate on overnight loans of 11.5 percent, which was cut 1 percentage point from 12.5 percent on Feb. 21, five of six economists who responded to the survey said. One forecast a reduction to 10.5 percent.

Governor Erdem Basci, who last week halted repo auctions at the benchmark rate, has increased borrowing costs to about 8.5 percent from about 7.5 percent since last month’s decision and may raise it to 11 percent in the short term, according to effective lending-rate calculations and forecasts by banks. The central bank is tightening monetary policy even as it seeks to support growth to meet Prime Minister Recep Tayyip Erdogan’s 4 percent expansion target this year in the $735 billion economy.

“The bank will continue to intermittently tighten domestic monetary conditions to support the lira, and keep macro-prudential tools fairly accommodative, to support the financial sector and the domestic economy,” Ahmet Akarli, chief regional economist for Goldman Sachs based in London, said in an e-mailed report before the decision. “More substantive easing in domestic monetary conditions would be possible only against the backdrop of accelerating capital inflows and moderation in domestic inflation.”

Annual Inflation

Annual inflation dropped to 10.4 percent last month after rising to 10.6 percent in January, the highest since November 2008, according to data compiled by Bloomberg. It dropped to 3.99 percent in March 2011, the lowest on record, from 33.4 percent in October 2002, the last reading before Erdogan’s Justice and Development Party swept into power.

Turkey’s economy will grow 2.6 percent in 2012, according to the median forecasts of 10 economists surveyed by Bloomberg. It grew 9.6 percent in the first nine months of last year, the fastest pace behind China among major economies.

Since last month’s rate decision, the lira has dropped 2.5 percent to 1.7865 per dollar as of 6:06 p.m. in Istanbul today. Turkey’s currency, the worst performer globally with an 18 percent drop against the dollar in 2011, gained 5.3 percent this year.

Policy Shift

Basci cut the top end of the lending rate last month after announcing Oct. 26 a central bank policy shift away from the benchmark, adopting a “corridor” in which rates fluctuate daily between 5.75 percent and 12.5 percent. The one-percentage point cut to the ceiling on Feb. 21 sent yields on the two-year benchmark debt down 14 basis points, or 0.14 percentage point, to 9 percent, the lowest since Oct. 19. The bonds reversed gains and yields have since jumped by 54 basis points.

“A further cut in the ceiling rate looks unlikely as the central bank has pushed up the cost of its lira funding recently and its officials have recently adopted a more hawkish tone,” Selim Cakir and Emre Tekmen, economists at Turk Ekonomi Bankasi AS in Istanbul, wrote in an e-mailed report to clients today. “The central bank will continue to squeeze lira liquidity and the average funding rate will approach 11 percent in the coming days.”

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