Turkey’s central bank should act to cut lending rates, bankers say

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The headquarters of the Central Bank of Turkey is seen in Ankara, Turkey, in this January 24, 2014 file photo. REUTERS/Umit Bektas

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ANKARA, Aug 19 (Reuters) – Turkey’s central bank is expected to take steps soon to bring lending costs closer to its recently cut policy rate, particularly for some corporate loans, three bankers told Reuters, after the bank said the gaps between the two rates had widened.

The central bank unexpectedly cut its key rate by 100 basis points to 13% on Thursday, despite inflation at 80%. It cited the widening spread between its policy rate and rising lending rates as having reduced the effectiveness of its monetary policy.

The central bank “decided to further strengthen macroprudential policy with tools supporting the effectiveness of the monetary transmission mechanism,” its policy committee said. Read more

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The three bankers, who requested anonymity, told Reuters the central bank had given a clear message and that they expected it to take action to cut lending rates.

They also expect the authorities to continue or even strengthen their current policy of encouraging selective lending, especially to exporters – a policy that has drawn criticism from the private sector for causing confusion. Read more

The new measures could be similar to existing practices such as requiring Treasury bills to be held as required collateral for banks issuing loans with interest rates above a certain level, bankers told Reuters.

One of the bankers pointed to three potential measures, including an effective cap on lending rates.

“If, for example, a bank lends at a rate higher than 22%, the central bank could force it to hold a long-term Treasury bond for part of the loan,” the banker said.

LARGE RATE DIFFERENCE

President Tayyip Erdogan’s economic program seeks to control inflation not through conventional rate hikes, but rather through rules and incentives designed to turn chronic current account deficits into surpluses.

Exporters thus have access to cheaper loans with rates close to the key rate of 13%. Similar business loans have rates close to 40%, while consumers borrow at around 50%.

The central bank currently imposes reserve requirements on banks for loans and requires them to hold bonds for foreign currency deposits.

Bankers expect the new measures to include lenders holding bonds as collateral, in line with past practice, and for resources not used for lending to go to the treasury.

The central bank said it was closely monitoring the pace of loan growth and would strengthen the transmission mechanism through lending policy, collateral and liquidity measures – although it did not describe them.

The rate cut took markets by surprise largely due to the already deeply negative real rate, rising inflation and the sharp depreciation of the Turkish lira, which sold off again after the decision.

The central bank said it had eased policy because economic growth had slowed and momentum in industrial production and employment needed to be maintained.

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Written by Ali Kucukgocmen; Editing by Jonathan Spicer and Leslie Adler

Our standards: The Thomson Reuters Trust Principles.

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