Source: Moody's; Republic of Türkiye set to increase rates amid slide in lira,

By Vincent Boland in Ankara ; June 5th, 2006

 

Turkey’s central bank is expected to raise interest rates for the first time in five years on Wednesday in a bid to arrest a heavy slide in the lira, deepening the woes of a government battling accusations that its reform programme is faltering.

 

An interest rate rise would dismay Recep Tayyip Erdogan, the prime minister, who has counted on continued rates falls and a booming economy to boost the government’s popularity before next year’s general election.

 

However, a sustained sell-off in the Turkish currency and rising inflation has thrown monetary policy into disarray, forcing the central bank to call an emergency meeting tomorrow at which a five-year cycle of interest rate cuts is expected to come to an end.

 

Analysts said the bank was left with little choice but to act after suffering a defeat in its battle with inflation. Figures released late on Friday showed that price rises in May pushed the annual inflation rate up to 9.9 per cent. The central bank’s year-end target is 5 per cent.

 

“Market sentiment is getting weaker day by day,” said Sevin Ekinci, an economist at WestLB in Istanbul. “The inflation situation is really a shock.”

 

Abdullatif Sener, a deputy prime minister, insisted the bank’s inflation target was “mathematically” achievable. He also pledged continued fiscal discipline and reform, with legislation on mortgages and an overhaul of corporate tax due to be approved by parliament before the summer recess.

 

Turkish business leaders recently accused the government of applying the brakes to reforms designed to get the country into the European Union. They have also been critical of the government’s religious agenda, which they say has added to Turkey’s recent buffeting by the markets.

 

The lira has fallen by about 17 per cent against the dollar and the euro in recent weeks. The chief trigger was a global sell-off in emerging markets, but Turkey’s case was worsened by deteriorating inflation data and a rise in political tension following the shooting of a senior judge last month.

 

The central bank could raise rates by as much as 100 basis points, analysts said, which would lift the overnight borrowing rate to 14.25 per cent. Rates have been cut on 29 successive occasions since the summer of 2001, when Turkey was in the depths of an economic and financial crisis with inflation at 80 per cent and overnight interest rates at 59 per cent.

 

The sustained sell-off in the lira poses a challenge for Durmus Yilmaz, the bank’s new governor. He was appointed in late April after the government, which has its roots in political Islam, first tried to impose a candidate steeped in Islamic-style finance, which eschews interest rates.

 

The lira fell by around 1.1 per cent against the dollar yesterday before recovering. Benchmark bond yields rose by around 150 basis points to around 19 per cent, and stocks fell 3.4 per cent. Top

 

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