Turkey raises lending rate 50 bps, will tighten if needed

   Turkey's central bank maintained its benchmark one-week repo rate at 4.5 percent but raised its overnight lending rate by 50 basis points to 7.75 percent and said "additional monetary tightening will be implemented whenever needed" until the inflation outlook is in line with medium-term targets.
    The Central Bank of the Republic of Turkey (CBRT), which in July raised its overnight lending rate by 75 basis points and also said it would tighten more if needed, kept the overnight borrowing rate steady at  3.5 percent along with the borrowing rate for primary dealers at 6.75 percent.
    The increase in the overnight lending rate, the ceiling in its interest rate corridor, was expected as the central bank's governor said last month the repo rate would be maintained for a long time while the interest rate corridor would continue to be adjusted as lire volatility posed a threat to inflation. The governor also raised the inflation forecast.
    The central said today that "due to ongoing uncertainties regarding the global economy and the volatility in capital flows, it is important to maintain the flexibility of the liquidity management" and it would continue to adjust the composition of lira provided to the market.

   Turkey's lira has been hard hit from the change in global risk assessments as investors prepare for a reduction in quantitative easing by the U.S. Federal Reserve, and the central bank said the weakness in capital flows that started in May had continued.
    "The Committee has indicated that these developments along with a more cautious monetary policy will bring the credit growth rates gradually to more reasonable levels," the CBRT said.
    Turkey needs to attract foreign investment to finance its current account deficit and higher interest rates tends to support the currency and thus an inflow of foreign funds. In recent years the central bank worked to stem the inflow of capital, which stoked domestic asset prices and inflation, but since May capital has been flowing out and the central bank has had to reverse policy.
     The lira has fallen 8.5 percent this year against the U.S. dollar and was quoted at 1.949 to the dollar today. Last month the Turkish central bank raised its inflation forecast for the end of this year to 6.2 percent and for the end of 2014 to 5 percent.
    In July Turkey's inflation rate rose to 8.9 percent from June's 8.3 percent, the highest rate in 10 months, and well above the central bank's 5.0 percent target. A depreciation in the lira's exchange rate tends to raise import prices and thus inflation.
    The central bank said it expects inflation to begin to ease from August.
    Turkey's current account deficit eased to US$4.4 billion in June from $7.3 billion in May and $8.3 billion in April. Last year the deficit amounted to 6.1 percent of Gross Domestic Product.
    The central bank said domestic demand and exports had shown moderate growth and the improvement in the current account continues, excluding gold trading.
    "The current policy framework, with the additional support from recent macroprudential policies, will continue to improve the current account balance," the CBRT said.
     Turkey's GDP expanded by 1.6 percent in the first quarter from the fourth for annual growth of 3.0 percent, up from 1.4 percent.
    Last month the central bank said growth this year may fall below a forecast 4 percent. A recent survey of economists, showed expectations for growth this year of 3.5 percent,  inflation at 7.3 percent and the lira-dollar rate at 1.93 at the end of the year.
    The central bank cut its repo rate earlier this year and shifted its interest rate corridor down to boost economic activity but since May it has been tightening policy to protect the lira due to an outflow of capital following news of a winding down of U.S. asset purchases and nervousness over the impact of demonstrations against the government.

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