Turkish Central Bank Cuts Rates to Stem Lira’s Advance

Turkey’s central bank cut both ends of its interest-rate corridor as it seeks to prevent the flow of money into its surging stock and bond markets from pushing up the lira.

The bank in Ankara reduced its overnight lending rate, the top of the corridor, to 8.75 percent from 9 percent and the overnight borrowing rate to 4.75 percent from 5 percent. It kept the benchmark repo rate unchanged at 5.5 percent. Most economists surveyed by Bloomberg had expected all three rates to stay the same.

The central bank has kept borrowing costs near the lower end of its rates corridor in recent months after growth in Turkey’s $800 billion economy slowed. Today’s rate cut is probably driven by concern the lira may become overvalued as the surge in Turkey’s stock and bond markets draws in money. The central bank took separate action to rein in a pickup in borrowing, imposing higher reserve requirements on lenders.

“The bank has shifted focus towards the financial stability risks posed by accelerating capital inflows,” Goldman Sachs Group Inc. said in a Jan. 18 report. It will use lower rates to “lean against these inflows and their subsequent FX appreciation pressures,” Goldman said.

The lira reversed earlier gains after the rate cut and fell for a third day, losing 0.2 percent to 1.7671 per dollar at 2:30 p.m. Yields on benchmark two-year bonds fell 6 basis points to 5.87 percent, heading for the lowest in more than a month.

Weaken Lira

Before this week, Turkey’s currency had gained almost 2 percent in a month against the dollar. Central bank Governor Erdem Basci says he’s monitoring an index of the currency’s real exchange rate, weighted against Turkey’s trading partners, and may act to weaken the lira if it appreciates.

As capital inflows accelerate, bank credit has started to grow faster than expected, the central bank said today. It stepped up its requirement for banks to keep reserves in order to tighten credit growth. The measures will transfer as much as $2.9 billion in foreign exchange and gold from lenders to the central bank’s reserves, as well as withdrawing 300 million liras from local-currency markets, it said.

Lending Cap

The central bank aims to keep loan growth within a 14 percent to 15 percent range, Deputy Governor Turalay Kenc said last week. Credit was expanding at a 17 percent annual pace as of Jan. 11.

Turkey’s economic growth slowed to about 3 percent last year, less than half its 2011 pace. That helped bring inflation down to 6.2 percent last month, the lowest for more than a year. The bank said today it expects a limited increase in the inflation rate in January.

Slowing inflation spurred a rally in the bond market, while expectations the economy will rebound this year have helped drive Turkey’s benchmark stock index up more than 50 percent since the end of May. Net foreign inflows to buy stocks and bonds exceeded $22 billion in the past 12 months.