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
