Dec 14 2017

Turkish bank may move very cautiously on rates after lira's gains

Turkey’s central bank may increase interest rates at a slower pace than expected on Thursday, or delay rate hikes entirely to help support economic growth.

Gains for the lira in recent days mean the bank could raise average funding costs by as little as 50 basis points, according to Işık Ökte, a strategist for BNP Paribas in Istanbul. That would leave policymakers more room for further rate hikes should lira volatility return, he said.

The central bank, facing calls from the government to support economic growth, is seeking to curb inflation and losses for the lira while avoiding big increases in interest rates. The lira has strengthened to 3.83 per dollar from 3.98 three weeks ago, paring losses since September to 11 percent. Some investors have called on the  bank to increase interest rates by as much as 500 basis points.  

The bank’s monetary policy committee will probably raise rates for its late liquidity window by 75 basis points to 13 percent and hike the overnight repo rate by 50 basis points to 9.75 percent, Ökte said. It would then restart lending at the overnight rate, meaning average funding costs would increase 50 basis points to 12.75 percent, he said in an e-mailed report on Thursday.

The central bank should refrain from raising rates entirely unless the lira weakens to beyond 4 per dollar, said Erkin Şahinöz, a former economist at the Federal Reserve Bank of Cleveland and a writer for the pro-government Sabah Group. Any other decision would be premature, he said, citing the relationship between interest rates and the lira’s level.