Central Bank may cut rates to balance lira

ISTANBUL - Hürriyet Daily News

The Turkish Central Bank does not plan an urgent drop in interest rates soon, but the issue will be on the table if the Turkish Lira remains strong until the end of the year, Central Bank Governor Erdem Başçı told Anatolia news agency yesterday.

Any such cut would be “measured,” Başçı said, adding: “The lira has come to an excessive level of appreciation. If it firms further, it may necessitate a policy reaction by the central bank.”

He said the bank would react in the short term if the real exchange rate index that it looks at to gauge lira strength or weakness stood between 120 and 125, and it would take strong policy action by using all its tools if the real exchange rate index passed over 130. At the end of October, the index stood at 117.40.

Following Başçı’s comments, the yield on Turkey’s two-year benchmark bond fell to a record low of 6.36 percent from a previous 6.53 percent, Reuters reported. The lira weakened to 1.7991 to the dollar, from 1.7896 late Nov. 9.

“This is pretty aggressive verbal intervention from Başçı - trying to get ahead of the curve, ready for any ‘wall of money’ that might accompany ratings upgrades - the market is speculating now over that second investment grade rating, which could bring a whole new investor base into Turkey,” wrote Timothy Ash, Head of Emerging Market Research at Standard Bank.

Başçı’s words claim that the Bank will not allow the lira to get overvalued, said OYAK Investment economist Gülay Elif Girgin. Last week, the credit ratings agency Fitch upgraded Turkey to investment grade, citing a declining government debt, a sound banking system, favorable medium-term growth prospects. The Central Bank cut its overnight lending rate on Oct. 18 as it tried to reinvigorate a slowing economy, while taking steps to curb loan growth and avoid stoking inflation. The bank brought down the upper end of the interest rate corridor it uses to control monetary conditions for the second month in a row to 9.5 percent from 10 percent.

Meanwhile, Anatolia news agency and the Central Bank signed a deal yesterday for the state-run news body to publish the Bank’s data.