Central Bank urges IMF loan accord

Bloomberg

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Prime Minister Recep Tayyip Erdoğan’s government should sign the agreement "soon," Yılmaz said during a "Monetary Policy" conference held in the Mediterranean city of Antalya yesterday.

The Turkish Central Bank is monitoring bank deposits to ensure that its cuts to the benchmark interest rate do not trigger a shift into foreign currencies, Yılmaz said. The 10.5 percent rate is not leading to a move, according to Yılmaz. The bank has reduced the rate by a total of 6.25 percentage points in the past five months and the level has reached a "critical point" at which investors may seek to buy dollars, said Ergun Özen, head of Garanti Bank, on March 23, according to Hürriyet newspaper.

The Central Bank is determined to use about $67 billion in reserves to ensure currency markets remain liquid, Yılmaz said. The Turkish Lira has lost about 23 percent of its value against the dollar since October last year. The bank on March 10 restarted daily auctions of dollars after the currency fell to the lowest on record the day before, weakening to as low as 1.8243 against the dollar. It has sold $50 million a day since then. Building up reserves is difficult and costly for the bank, which has to be "careful, almost miserly" in using them, Yılmaz said.

Direct sales of dollars on the market are an option if liquidity dries up sharply, he said. The bank also stands ready to increase the limits on foreign currency borrowing and to lower the amount of reserves lenders must deposit with the Central Bank, he said.

The decline in dollar deposits in Turkey over the last decade "was an achievement" and the Central Bank does not want people to return to the dollar as an investment, Yılmaz said. The economy contracted 6.2 percent in the fourth quarter and lower consumer demand is limiting the ability of retailers and importers to pass on the cost of the weaker lira to shoppers, he said.

Turkey’s Central Bank might make the overnight lending rate its benchmark this summer, replacing the borrowing rate as it shifts to being a lender to the money markets, Yılmaz said.

The bank is now a net borrower from the market, he told businessmen in Antalya. As liquidity falls in money markets it expects to become a net lender, at which point the lending rate would be a more relevant measure, he said. The present benchmark borrowing rate is 10.50 percent and the lending rate is 13 percent.

Cuts mentioned but not delivered

"Yılmaz’s statement implies that the lending rate could fall toward 10 percent in the coming months [and thus the borrowing rate toward 9 percent]," Yarkın Cebeci, an economist for JP Morgan Chase & Co in Istanbul, wrote in a note to investors. The bank "has mentioned these technical cuts a few times in the past but never actually delivered them as the liquidity squeeze was never as severe as it feared."