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Jan. 22 (Bloomberg) -- Goldman Sachs Group Inc. is forecasting a cut in the upper and lower ends of Turkey’s interest-rate corridor today, bucking consensus as it says concern over lira appreciation outweighs rising loan growth.
Turkey’s central bank will probably reduce its 5 percent overnight lending rate and 9 percent borrowing rate by 25 basis points, while leaving the 5.5 percent benchmark one-week repurchase rate unchanged, Goldman Sachs said in an e-mailed report Jan. 18. That may deter inflows that are pushing the lira up as Turkish, Indian and Russian bonds lead an emerging-market debt rally this year. Central bank Governor Erdem Basci set up the corridor in 2011 to fine-tune borrowing costs.
The Goldman Sachs view counters the majority of 11 analysts surveyed by Bloomberg, who forecast no change in interest rates as they expect the bank to wait for more loan data before making a move. The focus of Turkey’s central bank last year was limiting growth in lending that had exploded in 2011, driving the current-account deficit higher and leading to an 18 percent depreciation in the lira against the dollar that year.
“The bank has shifted focus towards the financial stability risks posed by accelerating capital inflows, and away from inflation,” Ahmet Akarli, an economist at Goldman Sachs in London, wrote in an e-mailed note. Interest-rate cuts “will be used to lean against these inflows and their subsequent currency appreciation pressures,” he said.
The lira appreciated against 27 out of 31 major currencies this month, according to data compiled by Bloomberg. That brought the central bank’s real effective exchange rate close to the 120 reading which Basci said in November would be a cause for concern. The index measures the lira’s purchasing power against the currencies of Turkey’s main trading partners.
The lira strengthened to 1.7530 per dollar on Jan. 17, the strongest level since Feb. 29 last year, on bets Moody’s Investors Service will raise Turkey’s credit rating to investment grade. Barclays Plc, Societe Generale SA and Morgan Stanley are among banks that have said Moody’s may upgrade Turkey this year, a move that would help include the country in more global bond indexes. That may generate additional investment flows, after Fitch Ratings raised government debt to investment-grade ranking in November. The lira fell 0.2 percent yesterday to 1.7639.
One-year interest-rate swaps, which indicate investor expectations of borrowing costs, fell one basis point to 6.47 percent yesterday. Four out of 11 analysts surveyed by Bloomberg expect the central bank to lower its overnight borrowing rate, while seven forecast the measure will stay at 5 percent. Basci cut the one-week repurchase rate by 25 basis points to a record 5.50 percent in December.
Excessive currency appreciation increases “systemic risk and can have a damaging effect on macroeconomic and financial stability,” Basci said Dec. 25. The governor has used the rates corridor, which allows him to raise or lower the cost of funding to banks daily, to control the flow of money and curb the current-account deficit.
The central bank wants to keep credit growth within a 14 percent to 15 percent range, Deputy Governor Turalay Kenc said during a roundtable discussion arranged by Euromoney Institutional Investor Plc in Vienna Jan. 15. Bank loans grew 17 percent to 805 billion liras ($457 billion) in the 12 months to Jan. 11, according to data from the banking regulator yesterday.
“The whole point here is how you’re going to maintain a solid currency without allowing the banks too much freedom,” Mariya Gancheva, an emerging-market strategist at Mitsubishi UFJ Securities International Plc, said by e-mail from London yesterday. “You’re likely to see some lull in action for now from a rates perspective and probably some tightening on the side of bank rules to limit loan growth.”
Five-year credit-default swaps on Turkey were unchanged yesterday at 126. That compared with 131 for Russia, 80 for Poland and 153 for South Africa. Rising prices show worsening perceptions of a borrower’s creditworthiness, and declining prices the reverse. The contracts pay the buyer face value in exchange for the underlying securities or cash if a borrower fails to adhere to its debt agreements.
The extra yield investors demand to hold Turkish debt denominated in dollars rather than U.S. Treasuries rose two basis points, or 0.02 percentage point, to 179, according to JPMorgan Chase & Co.’s EMBI Global Index. The premium compares with the emerging-market average at 264.
The lira’s gain this month has come after the central bank’s real effective exchange rate fell to 118.3 in December from 119.4 in November.
“The real effective exchange rate has approached the central bank’s threshold of 120,” Emre Tekmen and Selim Cakir, Istanbul-based analysts at BNP Paribas SA, said by e-mail yesterday. “Strong risk appetite” may lead to renewed appreciation pressure on the lira, prompting the central bank to cut its overnight borrowing rate, they said.
--Editors: Guy Collins, Stephen Kirkland