Fed QE Delay Bet by Basci Masked by Rate Increase: Turkey Credit

Turkish central bank Governor Erdem Basci is cutting the cost of funding to lenders even as he raises interest rates, a sign he’s betting the Federal Reserve will hold off tapering stimulus, according to Odea Bank AS.

The central bank’s average cost of funding fell to 4.95 percent on July 26 from 5.17 percent on July 23, when Basci raised the overnight lending rate, the top of his three-tiered corridor, by 75 basis points. The reduction was in contrast to the cost banks are paying for deposits for as long as three months, which rose 215 basis points from May 31 to 7.75 percent, the third-highest level among 20 major emerging markets.

The divergence in borrowing costs may be a result of Basci trying to support the lira and stem foreign-investment outflows, while keeping credit flowing to banks. It could be a signal he’s skeptical the Fed will start paring its bond-buying program as soon as the market predicts, said Inanc Sozer, an economic-research manager at Odea, the Turkish unit of Lebanon’s Banque Audi SAL-Audi Saradar Group.

“There’s a disconnect between the market and the central bank on interest rates,” Sozer said by e-mail July 26. “It seems the central bank thinks that the market has overpriced rate increases and so instead of trying to bring rates closer to markets, it’s trying to buy time. It’s trying to support growth as much as possible.”

Selling Dollars

The lira appreciated less than 0.1 percent to 1.9244 per dollar at 2:43 p.m. in Istanbul today, after slipping 0.4 percent last week. The central bank sold more than $6.5 billion in foreign exchange since June 11 to defend the lira, which reached a record-low 1.9740 on July 8.

Since last week’s rate meeting, when the central bank raised the upper end of its rates corridor for the first time since October 2011, Basci provided 11 billion liras ($5.7 billion) via its one-week repo rate of 4.5 percent, its lowest lending rate. That’s more than it funded at any other rate.

The lira could be stronger but the reduction in the cost of funding prevented that from happening, Sozer said.

The yield on two-year notes fell 17 basis points to 9.23 percent, which is still the highest among major emerging markets after Brazil. The yield has climbed 444 basis points from a record low on May 17 as concern grew the Fed would scale back stimulus measures and protests against Turkish Prime Minister Recep Tayyip Erdogan’s government erupted at the end May and spread nationwide.

Bond Outflows

Portfolio outflows from bonds and equities totaled $934 million in the week to July 19, according to central bank data released July 25. Bond outflows reached $3.4 billion and those from equities totaled $1.54 billion since May 31, the data show.

While Fed Chairman Ben S. Bernanke said on June 19 the U.S. central bank may reduce its monthly purchases of $85 billion of assets later this year and phase them out by the middle of 2014, a month later he told Congress the purchases “are by no means on a preset course” and may be reduced more quickly or expanded as economic conditions warrant.

Turkey’s credit-default swaps, contracts insuring the nation’s debt against non-payment, rose 16 basis points last week, the biggest weekly increase in a month, to 202, data compiled by Bloomberg show. They were unchanged today.

In a written statement accompanying Turkey’s rate decision last week, the monetary policy committee said that “additional monetary tightening will be implemented when necessary.”

“We’ll see the average cost of lending gradually increasing,” Ozlem Derici, chief economist at Ekspres Invest in Istanbul, said in a phone interview on July 26. “The central bank said during the turbulence that it will tighten lira liquidity.”

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