Central bank takes steps against currency benefits

Central bank takes steps against currency benefits

ISTANBUL - Reuters
Central bank takes steps against currency benefits

The Governor of Turkey’s Central Bank Erdem Başçı responds reporters’ questions at a discussion meeting. AA photo

Turkey’s central bank cut two of its three main interest rates yesterday in a bid to prevent speculative capital inflows from boosting the lira currency too sharply, while also taking steps to cool domestic loan growth.

A healthy economic outlook and the gradual move of each of its credit ratings to investment grade has boosted the appeal of Turkish assets, forcing officials to take steps to battle a flood of cheap cash from central banks in the developed world that threatens to knock its economy off balance.

The bank reduced the borrowing rate to 4.50 percent from 4.75 percent and the lending rate to 8.50 percent from 8.75 percent. 

But it kept its one-week repo policy rate, which it cut by 25 basis points in December, unchanged at 5.50 percent.

The bank also raised reserve requirements to keep loan growth in check, increasing the amount of lira and forex that lenders have to hold with the central bank.

“The measured weakening in the lira is expected to continue as a result of these actions. We expect a steepening in the yield curve,” said Ali Cakiroglu, senior investment strategist at HSBC Asset Management in Istanbul.

The bank’s complicated policy mix has drawn criticism from international investors and economists in the past, but has largely come up trumps by keeping Turkey growing steadily and robustly at a time when others are not.

But the bank has come under attack from some government ministers who say it has done too little to boost growth.

The economy is expected to have grown just 2.5-3 percent in 2012, below the government’s 3.2 percent forecast and less than half the pace of the previous year, a slowdown some ministers have blamed partly on cautious monetary policy.