Turkey Raises Lending Costs to Curb Double-Digit Inflation

  • Central bank boosts late liquidity rate by 75bps to 11.75%
  • Overnight lending, borrowing, one-week repo rates unchanged

Turkey’s central bank raised a key interest rate on Thursday and said it will maintain a tight monetary policy until the inflation rate, which is running at more than double the regulator’s target, improves.

The bank increased the late liquidity window rate by 75 basis points to 11.75 percent, in line with the median estimate in a Bloomberg survey of economists. It kept its one-week repo, overnight lending and borrowing rates unchanged. Illustrating the closer focus on the lira’s impact on consumer prices, the bank changed the wording in its statement to highlight the need for a “significant improvement” in the inflation outlook.

Turkey’s consumer inflation rate rose to 10.1 percent last month, compared with the central bank’s five-percent target.

The central bank’s second tightening in as many meetings comes after policy makers used a series of extraordinary measures to push the cost of lending to commercial banks to the highest level in almost five years to boost the currency. The regulator has been forcing lenders to use the little-used late liquidity window -- which is more expensive than Turkey’s three other key rates -- since January to tighten liquidity.

The lira extended gains after the decision and was trading 0.7 percent higher at 3.6504 per dollar at 3:21 p.m. in Istanbul.

Though Turkey’s economy is struggling with weak domestic demand, the pace of price gains is likely to increase through May and remain elevated for some time, according to Halk Yatirim economist Banu Kivci Tokali in Istanbul. A return to single-digit inflation isn’t likely before early in the second half of 2017, she said in an emailed note after the bank’s announcement.

‘Diverse Tools’

“We expect the bank’s tight stance to remain in place with the use of diverse monetary policy tools until inflation outlook improves,” she said.

Last year’s failed coup led to a contraction in the third quarter, and Turkey’s government is increasing spending and rolling out tax breaks and other incentives to spur growth ahead of an April 16 referendum on constitutional changes that would transfer sweeping powers to the presidency.

A rate increase would have a negative impact on costs and make inflation worse, Bulent Gedikli, a senior adviser to President Recep Tayyip Erdogan, said in an interview with Haberturk TV before the decision.

“Cost push pressures and the volatility in food prices in recent months have led to a sharp increase in inflation,” the bank said in the statement, adding that it expects price increases to accelerate in the short term due to the weaker lira.

The bank’s decision also comes after the U.S. Federal Reserve raised borrowing costs for the second time in three months on Wednesday. It didn’t shift to a policy of more aggressive future tightening, and that boosted emerging market currencies on Thursday.

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