Turkish Central Bank Keeps Benchmark Rates Unchanged

Turkey’s central bank kept its three benchmark interest rates unchanged today, sticking to a commitment made last month by Governor Erdem Basci.

The bank held the one-week repurchase rate at 4.5 percent, in line with Basci’s Sept. 24 statement that the rate would remain the same unless two-year inflation expectations worsen. It also kept the overnight lending and borrowing rates, which mark the upper and lower ends of the so-called interest rate corridor, at 7.75 percent and 3.5 percent respectively. The decisions matched the expectations of all economists surveyed by Bloomberg.

“The Committee will maintain the cautious monetary policy stance and continue implementing additional monetary tightening at the appropriate frequency until the medium-term inflation outlook is in line with the medium-term targets,” the bank said in a statement.

The inflation rate fell to 7.9 percent last month, the slowest since May.

“Governor Basci spoke very clearly last month,” Sertan Kargin, chief economist at Istanbul-based Eczacibasi Securities, said by phone. “The bank seems confident with inflation expectations.”

While the Turkish government is keeping the 2015 inflation forecast unchanged at 5 percent, it raised the estimate for the end of this year to 6.8 percent from 5.3 percent a year ago, according to the medium-term economic plan announced on Oct. 8.

Inflation Report

“Inflation is expected to fall further in the forthcoming period,” the bank said today. “However, core inflation indicators are likely to hover above the inflation target for some time due to the exchange rate volatility observed during the recent months.”

The central bank will announce a year-end forecast on Oct. 31 in its quarterly inflation report. The bank’s year-end forecast for consumer price gains in July, the last time it officially announced its prediction, was 6.2 percent. The lira’s depreciation since then made that forecast impossible to achieve, Basci said Sept. 24.

The central bank views core inflation, which strips out items including energy, food and gold, as a key indicator for future overall inflation. The core index accelerated to 7 percent last month, the highest since August 2012, compared with a target of 5 percent.

Hardest Hit

“We view the central bank’s inflation expectations as being on the optimistic side,” Deniz Cicek, an economist at Finansbank AS in Istanbul, said by phone. “The bank may need to revise interest rate levels early next year unless the inflation slows.”

The lira was one of the hardest-hit currencies by the emerging market selloff that began when U.S. Federal Reserve Chairman Ben S. Bernanke said May 22 that he may scale back a bond buying stimulus program. The lira weakened by 10.6 percent against the dollar between Bernanke’s May speech and Sept. 5, when it traded at a record low closing price of 2.0685 per dollar.

The currency weakened 0.36 percent to 1.9745 per dollar at 3:18 p.m., according to data compiled by Bloomberg. Yields on two-year benchmark lira notes fell by 5 basis points, or 0.05 percentage point, to 7.65 percent.

Reluctant Bank

The U.S. budget dispute weighed on fourth-quarter growth and will prompt Federal Reserve policy makers to wait until March before starting to trim stimulus, a Bloomberg survey showed last week.

The budget debate and signs that the Fed won’t start tapering before the end of the year is boosting the lira, which has strengthened about 2.3 percent against the dollar this month, allowing Basci to keep rates steady, Piotr Matys, an emerging-market analyst at 4cast Ltd. in London, said in e-mailed comments yesterday.

“Even before the lira recovered, the central bank of Turkey was reluctant to raise interest rates,” he said.

Before it's here, it's on the Bloomberg Terminal.