Basci Holds Turkey Rates After January Rise Slows Credit

Turkey’s central bank kept its three benchmark interest rates unchanged after emergency tightening of monetary policy in January slowed growth in consumer credit, a key driver of the economy.

The bank in Ankara kept its one-week repurchase rate at 10 percent, as forecast by all 23 economists surveyed by Bloomberg. It also kept the overnight lending and borrowing rates, the upper and lower ends of the interest-rate corridor, at 12 percent and 8 percent, respectively.

Central bank Governor Erdem Basci raised rates at an emergency meeting held Jan. 28, as a government corruption scandal exacerbated a run on the lira that began last year with the exodus of global investors from emerging markets. While the lira has showed signs it’s stabilizing, annual growth in consumer lending lost steam, according to official data.

“Any policy rate hike will be reserved as a last line of defense in episodes of significant lira weakness,” Barclays Plc emerging-markets strategist Durukal Gun and analyst Christian Keller said in an e-mailed report yesterday. “The monetary tightening thus far, combined with a slump in consumer confidence, has led to a significant slowdown in consumer credit growth.”

As Prime Minister Recep Tayyip Erdogan’s ruling party prepares for local elections at the end of the month, it’s facing the risk of slower economic growth amid fallout from a graft probe ensnaring the government.

Shrinking Growth

Growth in consumer loans fell to an annual 23 percent in the week ended March 7, from 26 percent in the week before the surprise rate rise in January, according to Bloomberg calculations based on central bank data.

“Loan growth continues to slow down in response to the tight monetary policy stance, recent macroprudential measures and weak capital flows,” the central bank said today in a statement.

The Turkish government introduced a slew of new restrictions on consumer loans this year, including limits to the repayment period, to help slow credit growth and narrow the current-account deficit, which it sees as the economy’s biggest vulnerability. The bank expects a possible slowdown in domestic demand growth and recovery in Turkey’s trade partners to help shrink the current-account gap this year, according to the statement.

Although “demand composition will support disinflation,” the bank expects annual consumer prince gains to accelerate until June, partly due to base effects, the bank said. Inflation accelerated to 7.9 percent last month; the bank’s target is 5 percent.

“Against this backdrop, inflation expectations and pricing behavior will be closely monitored and the tight monetary policy stance will be maintained until there is a significant improvement in the inflation outlook,” the bank said.

The lira weakened 0.1 percent to 2.2210 per dollar at 2:27 p.m. in Istanbul after the decision.

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