Basci Delays Turkish Rate Simplification as Volatility Rises

  • Turkey's central bank keeps three main interest rates on hold
  • Statement makes no mention of planned shift to single rate

Turkey’s central bank kept its three main interest rates on hold, noting the higher market volatility so far this year in a statement that didn’t include a reference to the planned simplification of its monetary policy.

The central bank kept its one-week repo rate at 7.5 percent, the overnight lending rate at 10.75 percent and the overnight borrowing rate at 7.25 percent, maintaining levels that have been in place since February, as anticipated by economists in a Bloomberg survey. The lira erased gains after the statement, trading little changed at 3.0362 to the dollar at 2:42 p.m. in Istanbul.

Whereas the central bank said in December it would begin steps to simplify its monetary policy at this month’s meeting if volatility remained low, Tuesday’s statement gave no indication of when the process might begin. Governor Erdem Basci, whose term expires in April, said in October that it would be “reasonable” to expect the shift toward a single benchmark rate to begin after the U.S. Federal Reserve lifted borrowing costs.

The bank "seems to have postponed the simplification of monetary policy for now," Erkin Isik, a strategist at Turk Ekonomi Bankasi in Istanbul, said by e-mail. The wording suggests the bank’s current policy, with no tightening or easing, is likely to remain until Basci’s term ends, he said.

The central bank introduced the three-pronged rate “corridor” five years ago to give it greater flexibility amid the global recession.

Surprise Hold

Policy makers surprised investors last month by delaying an anticipated rate increase, saying they would wait to see if reduced volatility observed after the Fed’s rate increase persisted. This time, only four of 20 economists surveyed by Bloomberg forecast an increase to the one-week repo rate, while two of 17 predicted an increase to overnight borrowing costs.

Inflation accelerated to 8.8 percent in December, the highest year-end level since 2011, missing the central bank’s target for a fifth year. The government’s decision to raise the minimum wage by 30 percent “is likely to keep inflation above the target band,” World Bank economists Ulrich Bartsch and Ayberk Yilmaz said in an e-mailed report on Monday.

Turkey’s currency has weakened 23 percent over the past year and the yield on two-year government bonds has jumped more than 360 basis points, the most in emerging markets after Brazil.

"A sharp rise in inflation over the coming months will, ultimately, force the committee to tighten monetary conditions," William Jackson, emerging market economist at Capital Economics in London, said by e-mail.

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