Eyes on Central Bank’s rate decision as cut hopes rising

ISTANBUL - Reuters

Turkey’s Central Bank Gov. Erdem Başçı speaks at a conference in this file photo. DAILY NEWS photo, Selahattin SÖNMEZ

Turkey’s central bank is expected to cut its benchmark policy rate today to guard against an appreciating lira, while raising reserve requirements to keep loan growth in check.

Rate cut expectations have grown after Central Bank Governor Erdem Başçı said the bank may consider cutting its one-week repo policy rate if the lira climbs too fast, which could widen Turkey’s already large current account deficit.

Turkish economic growth slowed down last year and has yet to pick back up. Domestic demand remains weak, although bank lending is rising faster than the central bank wants.

Focusing on its currency conundrum, Başçı said earlier this month that the bank may consider a “measured” rate cut if the real effective exchange rate of the lira exceeds 120 on an index of domestic prices relative to those of trade partners.

The real effective exchange rate (REER) index stood at 119.95 in March, inching towards the bank’s upper limit.

A stronger lira makes Turkish exports more expensive and imports cheaper, which can widen the current account deficit, putting the country deeper into debt to external markets. The gap is expected to grow to over $58 billion at the end of 2013 from $47 billion in 2012.

Lowering the borrowing rate could help deter capital inflows. Turkey could see a rush of such money if another major rating agency lifts it to investment grade, which would drive up the lira and add to its current account problem.

Reducing the lending rate, which effectively prices the cost of consumer loans, may help revive domestic demand.

The central bank has been trying to spur the economy since mid-2012 and began cutting interest rates last September.

Last month it unexpectedly slashed its overnight lending rate but moved to tighten liquidity overall.