Turkey Unexpectedly Raises Rates in Bid to Tame Inflation

Turkey’s central bank unexpectedly raised its overnight lending rate for a second month, saying it will continue to tighten policy until inflation meets targets.

The bank raised its overnight rate, the top end of its rates corridor, to 7.75 percent from 7.25 percent. None of the 11 economists in a Bloomberg survey forecast the change. It kept its benchmark one-week repo rate at 4.5 percent, in line with all 13 estimates in a Bloomberg survey. It also left its overnight borrowing rate unchanged at 3.5 percent.

Governor Erdem Basci uses the corridor to change the effective interest rate daily by providing funding at varying rates in different amounts.

Inflation jumped to 8.88 percent in July, the highest level in 10 months, on higher oil and food prices and lira volatility. The currency has weakened 5.1 percent since U.S. Federal Reserve Chairman Ben S. Bernanke said May 22 he may scale back monetary stimulus, threatening a drawback of liquidity that had boosted inflows to emerging markets. The central bank increased interest rates last month for the first time in almost two years to tame inflation and reduce the Turkish currency’s volatility.

“The central bank ultimately did the right thing, although the decision is more dovish then it appears,” Ahmet Akarli, Goldman Sachs economist in London, said by e-mail after the decision.

Above-Target Inflation

July inflation and the bank’s year-end forecast of 6.2 percent are well above the bank’s targets, which include 5 percent for end-2013.

“The cautious monetary policy attitude will be maintained and extra monetary tightening will be implemented as necessary until the inflation outlook is in line with medium-term targets,” the bank said today in a statement accompanying the decision. “Overnight lending rate was increased from 7.25 percent to 7.75 percent to increase the effectiveness of extra monetary tightening.”

The lira has weakened even as Basci raised the effective cost of funding to a one-year high of 6.53 percent on Aug. 15, nearing the limits of his tightening ability under the previous corridor range. The currency has declined by 0.8 percent since Basci signaled a tighter policy on July 15, compared with an 8 percent drop in the Brazilian real and a 6 percent drop in the Indonesian rupiah.

Lira Gains

The lira gained 0.3 percent to 1.9479 against the dollar at 5:39 p.m. in Istanbul. Yields on two-year benchmark notes fell 3 basis points to 9.36 percent, compared with the record low of 4.79 percent on May 17.

The bank said in today’s statement that it expects “a more cautious monetary policy” will help to gradually reduce credit growth rates as capital inflows weaken due to increasing global uncertainties. Governor Basci cited higher-than-targeted loan growth as an important risk to financial stability during a presentation in Ankara on July 30.

“The central bank is in a reactionary mode since May 22. This is understandable given current global conditions,” Isik Okte, a strategist at state-run Turkiye Halk Bankasi AS’s investment unit in Istanbul, said by e-mail before the decision today. “This is not the time to sit idly and watch.”

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