Turkish Central Bank Keeps Benchmark Interest Rate Unchanged

Turkish central bank Governor Erdem Basci left the benchmark interest rate unchanged at a historic low and signaled he may consider cuts if European debt problems put a halt to Turkish growth.

The central bank in Ankara kept the benchmark one-week repo rate at 6.25 percent, according to a statement on its website today. That matched the forecast of all 12 economists surveyed by Bloomberg. The bank will release minutes of the meeting within five working days.

Basci is trying to engineer a slowdown from the 11 percent annual economic growth that Turkey recorded in the first quarter and said today that the bank is sticking by its policy of low rates and curbs on bank credit, “given the growing uncertainty for the global economy.” A further loosening is possible if “problems in developed economies deepen and domestic activity halts,” according to the statement.

The bank believes there are “no problems at home,” Tatha Ghose, senior emerging-markets economist in London at Commerzbank AG, said in e-mailed comments. “The ongoing global soft patch could indeed dent the current-account deficit and core-inflation trend for a quarter or so, but we think that this would at best be an interim correction.”

The lira fell after the announcement, extending earlier losses. The currency dropped as much as 1 percent and declined 0.4 percent to 1.6685 per dollar at 6:32 p.m. in Istanbul.

“The fact they confirmed that the door is open for a looser monetary policy if the situation deteriorates in the euro-zone is negative for the lira,” HSBC currency strategist Murat Toprak in London said in e-mailed comments. “We keep our bearish bias, with the lira moving up to 1.70-75” per dollar.

Reduce Lending

The bank is keeping rates low to weaken the lira and has increased reserve requirements for banks four times since December to reduce lending and tame a boom in consumer demand that is drawing in imports and driving the current-account deficit to record levels.

Those measures, combined with action by the banks regulator to increase provisions, have “brought domestic demand under control,” according to today’s statement, in which the central bank repeated forecasts of an improvement in the current-account deficit in the last three months of the year.

Industrial output fell in each of the four months through May, according to the statistics agency. Inflation slowed to 6.2 percent in June from 7.2 percent. The central bank’s target for the end of the year is 5.5 percent. Yields on two-year lira bonds have dropped about 40 basis points to 8.8 percent since the end of June.

Current-Account Gap

The 12-month current-account gap widened to a record $68.2 billion, or about 9 percent of gross domestic product, in the 12 months to May. The deficit is the biggest risk to Turkey’s financial stability, according to a central bank report in May.

Loan growth slowed to 36 percent as of July 8, from about 40 percent last year, the bank regulator said July 18. The central bank aims to reduce that to 25 percent by the end of the year.

Concern that Turkish authorities aren’t doing enough to narrow the trade gap helped push the lira down about 8 percent against the dollar this year, the most of 25 emerging-market currencies tracked by Bloomberg.

The central bank cut the main rate in December and January, taking the rate to the lowest since the country began inflation targeting in 2002.