Turkey Economy: Interest Rate Rise

British Consulate General Istanbul

July 2013

Summary

Turkish Central Bank increases interest rates in line with expectations, leading to slight fall in value of the Turkish Lira.

Detail

As anticipated, the Turkish Central Bank’s Monetary Policy Committee raised its overnight lending rate for the first time in two years, by 75 basis points (bps) to 7.25% on 23 July. Ahead of the decision expectations ranged between 50 and 100 bps. The Bank also decided not to hold foreign exchange (FX) auctions and not to allow lending to primary dealers at 6.75%, but at 7.25% during periods of additional tightening. This corresponds to an overall 125bps increase. The Bank left the overnight borrowing rate unchanged at 3.5% and the policy rate at 4.50%. Following the decision, the Turkish Lira (TL) fell by 1% to TL 1.90 against the US$, but ended 25 July at TL 1.92. The yield on the two-year benchmark bond rose from 8.87% to over 9%.

In its statement accompanying the rise, the Bank said that it had decided to tighten monetary policy because of global uncertainty and higher than projected loan growth.  Inflationary pressures had increased for a variety of reasons, but these would be temporary. The Bank would maintain a cautious monetary policy stance until the inflation outlook is in line with the medium term targets. Additional tightening would be implemented as and when necessary.

Some analysts, including Finansbank Chief Economist Inan Demir, have suggested that the rate rise still leaves the TL exposed to shifts in risk appetite. Demir noted that with inflation of 8.3%, compared with the year-end target of 5.3% and a rising current account deficit, Turkey clearly needed higher interest rates in order to boost confidence against a possible deterioration in global risk appetite. Many analysts also agreed that the Bank had left the door open for further rises in the second half of 2013, depending on the inflation outlook and on external developments. Analysts from JP Morgan Chase and Finansbank expect a cumulative 150 bps rise by the end of 2013. Morgan Stanley claims  that the Turkish economy is more fragile and less attractive than Russia among emerging markets.

Deputy Prime Minister Ali Babacan and Finance Minister Mehmet Simsek have begun lowering expectations for 2013 year-end growth.  Economy Minister Caglayan, a long term supporter of higher growth, by contrast, said that he believed Turkey would hit the year-end target of 4%. On 23 July he said the Government would introduce new incentives aimed at promoting product and market differentiation to support exports. Turkish export growth has abated in 2013. Total exports increased by 0.6% in June 2013, compared to the same month last year. In June 2012, exports had increased by 17% year-on-year.

Comment

The Bank’s decision has had limited impact on markets, which had anticipated the rate rise. The Bank will continue to face the challenge of holding  down inflation and the pressure on the TL, whilst supporting Turkey’s growth, despite higher interest rates.

The economy continues to face challenges including a possible slowdown in growth in 2013, unemployment – currently at 10%, and reduced  capital inflows. Turkey is nevertheless likely, despite other difficulties, to continue its policy on major infrastructure investments, where UK businesses have a stake

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report

Countries: Turkey
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