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Turkey Central Bank Unexpectedly Cuts Top End of Rates Corridor

Turkey’s central bank unexpectedly cut the top end of its so-called interest rates corridor and said it’s placing more emphasis on bank reserve requirements to manage capital flows and credit growth.

The Monetary Policy Committee in Ankara cut its overnight lending rate to 7.5 percent from 8.5 percent, according to a statement on the bank’s website today. The median estimate in a Bloomberg survey of 10 economists predicted no change, while two economists predicted a quarter-point decrease.

Central bank Governor Erdem Basci introduced the rates corridor in October 2011, allowing him to vary rates on a daily basis in response to changes in capital flows and the value of the lira. The bank said today the need for a wide corridor had significantly decreased.

“The Committee has decided to increase the effectiveness of the Reserve Options Mechanism gradually in response to the heightened volatility in capital inflows,” the central bank said today. “The automatic stabilizer effect of this mechanism reduces the need for a wider interest rate corridor.”

The reserve option mechanism is the multiplier at which banks are allowed to keep required reserves for lira liabilities in either foreign exchange or gold at the central bank. Raising the multiplier, as the bank did today, makes it more expensive to keep the reserves in foreign exchange or gold. Moody’s Investors Service senior credit analyst Sarah Carlson called the mechanism “untested” and “unique” in a confererence on Turkey in Istanbul on Nov. 21.

Yields Rise

The central bank kept its benchmark one-week repo rate at 5.5 percent and its overnight borrowing rate, the lower band of the corridor, at 4.5 percent, in line with forecasts. Today’s cut means the bank has lowered at least one of its three rates at every meeting since September.

The Turkish lira pared gains and bond yields rose after the decision. The lira gained 0.3 percent to 1.8165 per dollar at 4:15 p.m. in Istanbul. Bond yields rose two basis points to 6.33 percent, extending their increase this month to 64 basis points, the biggest increase among 20 major emerging markets tracked by Bloomberg.

The central bank did not adjust reserve requirement ratios as widely expected, indicating an expectation that “decelerating capital inflows will likely limit loan growth in coming months,” Hakan Aklar, an economist at Ak Investment in Istanbul, said in an e-mailed report today. “Uncertainties in global markets require a flexible monetary policy” and “in today’s minutes, there was not a clear signal for policy implementation for the coming months,” he said.

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