Lira Advances as Babacan Seen ‘Hawkish’ on Credit Expansion

Turkey’s lira gained for a second day after Deputy Prime Minister Ali Babacan said loan expansion above the government’s 15 percent target will lead to policy action to tighten liquidity.

The lira gained 0.2 percent to 1.7659 per dollar at 11:29 a.m. in Istanbul. The increase extended the currency’s appreciation this year to 1 percent.

Turkey’s central bank has been balancing a policy of cutting rates to deter capital inflows while increasing reserve requirements at banks to limit loan growth. The government’s target for credit expansion is 15 percent this year, after a 30 percent surge in loans in 2011 contributed to an 18 percent depreciation against the dollar, forcing the bank to control credit expansion via a so-called interest-rate corridor.

“Don’t expect credit growth to rise above 15 percent,” Babacan said in an interview with BloombergHT television in Davos, Switzerland today. “If developments exceed expectations, the necessary steps will be taken.” Raising reserve requirements is an “easy measure” to stem loan growth, he said.

Central bank Governor Erdem Basci’s rates corridor allows him to vary funding costs to banks daily by using the overnight borrowing and lending rates in addition to the policy rate. The bank cut both overnight rates by 25 basis points, to 4.75 percent and 8.75 percent, respectively, on Jan. 22. It left the benchmark policy rate unchanged at 5.5 percent, a record low.

Getting Hawkish

Babacan’s comments indicate policy makers will be uncompromising in their intention to limit loan growth even as interest rates fall, according to Isik Okte, a strategist at the investment unit of state-run Turkiye Halk Bankasi AS in Istanbul.

“These guys are getting hawkish,” Okte said in e-mailed comments today. “Mr. Babacan’s comments that the central bank can raise reserve requirements if loan growth exceeds 15 percent is seen as a hawkish remark and is helping the lira.”

Yields on two-year benchmark notes were unchanged at 5.84 percent today, the lowest level since Dec. 18 on a closing basis.

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