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Turkey’s Central Bank Pauses Cuts, Tracks Lending    
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By : Steve Bryant, Bloomberg

Feb. 15 (Bloomberg) -- Turkey’s central bank left its benchmark interest rate unchanged, after two months of cuts, to assess whether curbs on lending are reducing consumer demand.

The bank in Ankara kept its one-week repo lending rate at a record low of 6.25 percent, according to an e-mailed statement today. Six of seven economists surveyed by Bloomberg this week had predicted no change. The bank will release minutes of the meeting within eight working days.

Governor Durmus Yilmaz unexpectedly lowered the rate in December and January, seeking to deter short-term capital inflows and weaken the lira. He said the easing would be more than offset by higher reserve requirements for banks that will slow lending. The central bank will now spend the time until its next meeting on March 23 “closely tracking the tightening impact of the policy mix” and will take additional steps should they be needed, according to today’s statement.

“A pause is positive for markets because the policy is very complex and it was hard to read the path ahead,” Sengul Dagdeviren, chief economist at ING Bank AS in Istanbul, said in a phone interview. “It’s also welcome to see the caution the bank is starting to display about inflation.”

Markets Rally

The lira rallied and Turkish bonds extended gains after the decision was announced. The yield on two-year lira bonds fell 10 basis points to 8.28 percent at 2:30 p.m. in Istanbul. The lira strengthened 0.4 percent to 1.5885 against the dollar, after dropping as much as 0.5 percent.

Rising global energy and commodity prices pose “an additional risk to inflation,” the statement said. External demand is likely to increase and the labor market, while weak, is improving, it said.

Markets will are able to take “a breath for this month at least,” said Suha Yaygin, deputy chief of emerging markets at Toronto--Dominion Bank in London, said in e-mailed comments. “The pressure on bonds will be lifted.”

Bond yields have risen about 90 basis points and the lira lost about 5.5 percent of its value since the central bank’s new policy mix was announced on Dec. 13. A weaker lira makes imports more expensive and helps exports by making their prices abroad more competitive. The current-account deficit in December was $7.5 billion, the widest in more than 25 years, as the growing economy pulled in consumer goods and raw materials.

External Demand

The economy probably more than 8 percent last year, Industry Minister Nihat Ergun said today. The growth is “not balanced” because it’s based on strong domestic demand, Yilmaz told investors in London on Feb. 7. Today’s statement said the bank expects a “measured” increase in external demand ahead.

Prime Minister Recep Tayyip Erdogan is seeking re-election and says his priority for his third term in office would be drafting a new constitution.

The central bank’s new policy aims to restrain domestic demand by forcing banks to set aside more reserves against lending. The central bank made increases on Jan. 17 of as much as 4 percentage points to the reserves banks must set aside against short-term liabilities, hindering lending. Those changes won’t take full effect until Feb. 18.

Outstanding consumer loans excluding credit cards were 128 billion liras ($80 billion) in the week ending Feb. 2, about 38 percent higher than a year earlier, according to central bank data. The government thinks loan growth of between 20 percent and 25 percent would be better, Deputy Prime Minister Ali Babacan said in December.

Net income last year at Turkiye Garanti Bankasi AS, the biggest single provider of consumer lending, rose 6.2 percent to 3.15 billion liras, the company said Feb. 10.

Inflation slowed to a four-decade low of 4.9 percent in January. The bank said today it expects it to slow again this month before a period of volatility from the second quarter.

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