Turkish central bank leaves benchmark interest rate unchanged

Turkey’s central bank left its benchmark interest rate unchanged at a historic low after a surprise cut three weeks earlier.

The central bank in Ankara kept its one-week repo lending rate at 5.75 per cent, according to an e-mailed statement. That matched the forecast of 15 of 18 economists surveyed by Bloomberg. The bank will release minutes of the meeting within five working days.

The bank’s cut at an extraordinary rates meeting on August 4 was an “early action” designed to cushion the economy from the impact of a likely slowdown caused by European debt problems, Governor Erdem Basci said in a written interview with Bloomberg last week. The bank may have to loosen monetary conditions further, depending on how Europe deals with the sovereign-debt crisis, he said.

“They feel they’ve already done a lot to shield the economy,” Inan Demir, chief economist at Finansbank AS in Istanbul, said in a telephone interview. “Basci has now been trying to talk up the lira and a cut would conflict with that.”

The lira has fallen about 3 per cent against the dollar since the rate cut, extending a decline that’s reached about 13.5 per cent this year, the most among 25 emerging-market economies tracked by Bloomberg. The bank on August 4 lowered the foreign-currency reserve requirements banks must set aside against liabilities, releasing an additional $930 million into the market.

The currency is undervalued against a basket comprising the dollar and the euro, Basci said August 15.

The economy expanded 1.4 per cent in the first quarter from the end of 2010. Growth may be flat in the second quarter, Basci forecast. The 12-month current-account gap widened to a record $72.5 billion in June. The deficit will improve in the second half of the year, helped by slowing growth, the weaker lira and cheaper oil prices, Basci said.

Inflation accelerated to 6.3 per cent in July from 6.2 per cent a month earlier. Inflation will end this year closer to the bank’s 5.5 per cent goal than its forecast of 6.9 per cent, made last month, Basci said.

The bank has increased reserve requirements four times since December to reduce bank lending and tame a boom in consumer demand that drew in imports and drove the current- account deficit to record levels. The higher ratios now give the bank room to loosen monetary policy without using the benchmark interest rate.