Turkey raises interest rates for the third time in a month to stem inflation
ANKARA (Combined reports) – Turkey’s central bank has raised its key interest rate by 25 basis points to 17.5 percent, the third hike since last month as it battles with rising inflation. The decision was made Thursday evening at a regular meeting of the bank’s monetary policy committee. In June, the central bank raised its key overnight borrowing rate twice, first from 13.25 to 15.0 percent and then to 17.25 percent. Inflation has been on the rise since April, pushed up by increasing oil prices and a depreciation of the Turkish lira. The currency has been hit by global capital flight from emerging markets and political tensions at home. «The rise in inflation will continue in July, given the belated impacts of foreign exchange rates,» the bank said in a statement on its website. Both the government and the bank have conceded that inflation will overshoot a 5.0 percent target this year. The statement said the central bank has now focused on keeping the 2007 inflation target of 4.0 percent within reach. «We expect that the falling trend in inflation will become evident from the second quarter of 2007,» it said. Battling inflation is a key element in a three-year 10-billion-dollar standby deal between Turkey and the International Monetary Fund (IMF). Tight economic policies, backed by the IMF, have helped the government beat its inflation targets over the past three years, bringing the rate to 7.7 percent in 2005 from 29.7 in 2002. Rising interest rates and debt provisions will hit Turkish banks’ profits this year, while falling bond values will hit reserves, said Yapi Kredi General Manager Kemal Kaya. The lira fell as much as 25 percent in May and June, though it has since clawed back some losses, and borrowing rates rose 425 basis points to rein in inflation of around 10 percent. «Fixed rates on loans, despite a rise in the cost of funding, will shrink margins, and provisions against an increase in bad loans will have a negative impact on profit,» he told reporters late on Thursday. The fall in bond values that accompanied the higher rates will mainly hit banks’ equity, rather than profit, he said, since Turkish banks take adjustments to the value of holdings in most government bonds against equity reserves, rather than to profit and loss. Kaya said he expected a slowdown in loans amid slower economic growth and higher rates. Economists have revised down their growth forecasts for 2006 to 4.5 percent compared with a government forecast earlier this year of 6 percent. «At the end of 2005, loans (for the sector) rose 51 percent. We expect them to rise 29 percent in 2006 and 21 percent in 2007,» he said. Housing loans in the first half rose 233 percent year-on-year in the sector, while consumer loans rose 111 percent. Yapi Kredi, which will merge with Koc Bank in October, is partly controlled by Italy’s Unicredito, one of several foreign banks to have bought into Turkey in recent years. Kaya said margins would be squashed by fixed rates on loans amid higher benchmark rates, and for 2006 the spread between borrowing and lending would be 6 percentage points, compared with 7.2 points in 2005.(AFP, Reuters)
