Turkey’s central bank raises its rates again

ISTANBUL – Turkey took the latest in a series of dramatic steps to shore up investor confidence in its faltering financial markets yesterday as the central bank raised key lending rates and vowed to boost the battered lira. Economists welcomed the rate increase which followed direct currency market intervention and money auctions to ease pressure on the lira, which has lost a fifth of its value since end-April after a surge in inflation jeopardized IMF-backed targets. General jitters over emerging markets and Japan’s tighter monetary policy have also driven the lira’s slide. Political uncertainty in Turkey and a gaping current account deficit have added to investor nervousness. The bank raised the overnight lending rate by 200 basis points to 22.25 percent to help shore up the lira and fight resulting inflation, which jumped to 10 percent in May, putting a year-end target of 5 percent agreed upon with the International Monetary Fund virtually out of reach. Central bank governor Durmus Yilmaz said in a statement to Reuters that the bank had withdrawn 5.2 billion lira (2.55 billion euros) from the market over the past 15 days and would continue this process until it had totally removed pressure on the currency. «Because the aim of the lira deposit auctions was to withdraw a certain volume, we are leaving the interest rates to the market. For this reason we have adjusted all the lending rates upward,» Yilmaz told Reuters. The bank later said in minutes to its last two rate meetings that after its series of measures inflation was now more likely to end this year in single digits while the impact of a weak lira on 2007 inflation had lessened. But growth would also slow this year significantly and could slow next year too. The bank targets 4 percent inflation for 2007. It said the monetary policy committee believed medium-term inflation targets could be reached and the bank would take the necessary action to check inflation. The lira, whose slide has put further pressure on inflation, firmed 1.6 percent yesterday to close at 1.6125 on the interbank market. That was still 18 percent weaker than it ended April. The bank, which this month came under criticism for acting too slowly on inflation and the lira fall, kept the key borrowing rate steady at 17.25 percent, having already raised overnight rates by 400 basis points this month. «The central bank raised the lending rate in order to increase the costs for those who want to convert lira into dollars. This seems to have halted the demand for dollars for now,» said one banker, who declined to be named. Shares, which have been hit by concern about the impact of rate increases on corporate earnings and growth, trimmed their losses yesterday. Bond yields fell slightly. Analysts welcomed the latest rate rise but highlighted its likely impact on the EU-applicant country’s economic growth, which is targeted to be 5 percent this year. Last year the economy grew by 7.6 percent as Turkey emerged out of a deep 2001 financial crisis. «As an investor, I would welcome these steps for the moment,» ING’s Luis Costa said. «But there are obvious consequences for growth. There will be some pain but for now they have to focus on the issues at hand.» Inflation pressure The lira began to tumble after April inflation data came out much higher than expected and a further worsening in May increased the pressure. Markets are now waiting for June data, due on Monday. Economists are also concerned about the political outlook, particularly over who will be the next president next May. Tensions have risen in recent months between the Islamist-rooted ruling Justice and Development Party (AKP) and the powerful secularist establishment, which fears Prime Minister Recep Tayyip Erdogan or someone close to him will seek the top job and try to undermine the country’s strict division of state and religion. Investors also fear the Cyprus issue could obstruct Turkey’s progress toward European Union membership. Erdogan rattled markets when he said he would rather risk suspension of Turkey’s own EU entry talks, than yield over Cyprus. Yilmaz, who recently took over as central bank governor after a clash between the AKP and the current secularist president over who to appoint, stressed that pressure on the exchange rate had eased because of the central bank’s measures. «We are aiming to completely remove this pressure soon,» Yilmaz told Reuters. The rate rise followed an extraordinary policy meeting on Sunday, the second of its kind this month, at which the bank increased both lending and borrowing rates by 225 basis points. At a regular meeting on June 20 it had left rates unchanged. «As a result of the policy flexibility brought by the deposit auctions, the need for an unscheduled meeting of the monetary policy committee has lessened,» Yilmaz said. The bank withdrew 1 billion lira (492 million euros) from the market in two lira deposit purchase auctions yesterday, the third day of such tenders. It also began dollar sale auctions this week to support the lira, but it said no such auction would be held yesterday.

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