Turkey May Delay Interest Rate Increase Until Late Next Year,Yilmaz Says By Ali Berat Meric and Steve Bryant - Oct 26, 2010 12:34 PM GMT+0200
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Turkey’s central bank said it’s unlikely to raise interest rates before the fourth quarter of next year, pushing back the date as gains in the lira widen the trade deficit.
The bank’s main scenario is based on the assumption that “policy rates are kept at present levels a while longer and there are limited increases from the last quarter of 2011,” Governor Durmus Yilmaz said today at a news conference in Ankara to release the bank’s quarterly inflation report. Under those conditions, inflation will probably slow to 5.4 percent at the end of 2011, he said, raising the forecast from 5.3 percent.
The bank has kept the benchmark one-week repo rate unchanged at 7 percent since December even as the economy grew at a pace of almost 11 percent. Domestic demand has fueled the rebound, drawing in imported energy and consumer goods. Slower export growth has contributed to a widening trade gap, leading industrialists to demand measures to curb the lira’s gains.
The lira has risen about 5 percent against the dollar this year and more than 8 percent against the euro. The 12-month current-account gap widened to $33.6 billion in August, more than double the year-earlier figure.
That deficit, together with faltering growth in the European economies that are the main markets for Turkish-made cars and household appliances, should inspire “care” from policy makers, said Yilmaz. The bank’s next monetary policy meeting is on Nov. 11.
Bond Yields Plunge
Yields on benchmark two-year bonds fell to a record low after Yilmaz spoke, dropping 12 basis points, or 0.12 percentage point, to 7.57 percent at 1:10 p.m. in Istanbul. That compares with yields of less than 1 percent in the U.S., the euro region and Japan, according to Bloomberg data, attracting international investment in Turkish assets that helps to push the lira up.
Short-term portfolio investments in Turkey jumped to $13.8 billion in the first eight months of the year, from $1.6 billion in the same period of 2009, the central bank said on Oct. 11.
The bank “will be reluctant to hike the policy rate, which would increase interest rate differentials, attract further capital inflows, and contribute to the divergence between domestic and external demand,” Inan Demir, chief economist for Finansbank AS in Istanbul, wrote in a note to investors after today’s announcement.
Domestic demand is expanding a “little” faster than the bank previously predicted, pushing its inflation forecasts higher, Yilmaz said. The bank predicted end-2012 inflation of 5.1 percent, up from the 5 percent it foresaw in July. The forecast of 7.5 percent for the end of this year was unchanged. The inflation rate was 9.2 percent last month.
‘Liquidity Reduction’
Yilmaz may “rely on liquidity reduction measures to slow credit growth” instead of raising rates, Demir said.
The central bank last month increased the level of lira reserves banks must deposit, partially reversing a reduction it had made in December 2008 to provide emergency liquidity during the global crisis. The withdrawal of liquidity is “almost” complete, Yilmaz said today.
To contact the reporters on this story: Steve Bryant in Ankara at
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