Turkey may narrow interest rate corridor

The Turkey’s Central Bank (CB) has said it may narrow its interest rate corridor gradually if European debt problems and global growth concerns continue to undermine risk appetite. Core inflation is expected to increase further in the coming period, posing upside risks to inflation expectations and price-setting behaviour, the bank said in a presentation to economists and investors published on its website. The comments echoed ones made after a monetary policy committee meeting last week. The bank also said policy instruments may be eased should global economic problems intensify and lead to a contraction in domestic economic activity. “The interest corridor may be narrowed gradually, should the sovereign debt problems regarding some European economies and the concerns on global growth continue to have an adverse impact on risk appetite,” the bank said. Last week the bank left its policy rate, the one-week repo rate, unchanged at 6.25 per cent, while the overnight borrowing rate remained at 1.5 per cent and the lending rate at 9 per cent - the corridor being the difference between these two rates. The bank reiterated on Friday that low policy rates and high reserve requirements may be preserved for an extended period to contain the risks against price and financial stability. But it said it will not hesitate to tighten monetary policy if the achievement of medium-term inflation targets is threatened. Since late 2010 the bank has pursued an unorthodox monetary policy of lower interest rates to deter inflows of hot money from inflating the lira alongside higher required reserve ratios for banks to cool lending and ensure an overall tightening effect. However, there is concern among analysts that the economy, which grew 11 per cent in the first quarter, may overheat and the bank may fall behind the curve in fighting inflation. Friday’s presentation followed the central bank inflation report on Thursday which showed the bank held its 2011 and 2012 inflation forecasts steady and said it saw no reason to hike its policy rate. Central Bank Governor Erdem Basci also said on Thursday that further depreciation could push up prices and signalled that it would take action to prevent further depreciation of a recently weak lira. From/ Gulf Today