Turkey Central Bank Cuts Rates; Lira Weakens

Turkey’s central bank reduced overnight interest rates and raised reserve requirements in an effort to rein in the lira’s appreciation while curbing loan growth. The currency and bond yields sank.

The Ankara-based bank cut the overnight borrowing rate to 4.5 percent from 4.75 percent and the overnight lending rate to 8.5 percent from 8.75 percent. It left the benchmark one-week repo rate unchanged at 5.5 percent and also raised foreign-exchange reserve requirements to 11.5 percent from 11.1 percent, withdrawing $940 million from the market.

“This seems to be the new policy mix of choice on the part of the central bank, still favoring a dovish bias on the rates front, just to make sure that the lira doesn’t strengthen too much, but also keeping a close eye on credit developments,” Benoit Anne, head of global emerging markets strategy at Societe Generale SA in London, said in e-mailed comments.

The lira fell 0.7 percent to 1.7791 against the dollar at 2:53 p.m. in Istanbul, its weakest intraday level since Jan. 9. Yields on two-year benchmark bonds dropped 10 basis points, or 0.1 percentage point, to 5.66 percent, a basis point off its record low.

Discourage Growth

Turkey’s central bank cut the one-week benchmark repo rate to 5.5 percent in December in the first cut to the rate since August 2011 as economic growth fell to about 2.5 percent last year from 8.5 percent in 2011. The unemployment rate rose to 9.4 percent in November from 9.1 percent in October, the statistics office data showed on Feb. 15.

Loans grew 19.1 percent in the 12 months to Feb. 8, according to data published by the banking regulator on Feb. 18, exceeding the central bank’s 15 percent ceiling for loan growth.

“Reserve requirement ratio hikes are designed to discourage credit growth,” said Manik Narain, an emerging market strategist at UBS AG in London, while “downward shifts to the overnight rates corridor are designed to ward off speculative short-term inflows.”

The Real Effective Exchange Rate for the lira rose to 120.16 in January, exceeding a level signaling the lira is overvalued for the central bank. A “measured rate cut to the interest rate corridor or policy rate is possible if the real effective exchange rate appreciates excessively,” Governor Erdem Basci said Jan. 29.

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