Turkey's Central Bank May Increase Benchmark Rate: Week Ahead

By Steve Bryant

July 14 (Bloomberg) -- Turkey's central bank will probably raise its benchmark interest rate this week, sacrificing economic growth to tame inflation, a survey shows.

The bank will lift the overnight borrowing rate by half a percentage point to 16.75 percent, according to 11 of 20 economists surveyed by Bloomberg. Eight expect a quarter-point increase and one forecast three-quarters of a point. The bank will announce its decision at 7 p.m. on June 17.

A third increase in borrowing costs in as many months would be the bank's response to surging energy and food prices that have driven up inflation in emerging economies including South Africa and Brazil. Turkey added 1 percentage point to the rate in May and June, making it the highest among major developing markets.

``The trend for inflation remains upward,'' said Erkin Isik, an economist for Fortis Bank AS in Istanbul. ``With uncertainty on foreign markets still high, there's no reason for the bank to change its stance.''

The central bank on June 4 abandoned its target of 4 percent inflation for next year, setting a goal of 7.5 percent after record oil prices made the objective unattainable. Regaining market confidence is the bank's central task, Governor Durmus Yilmaz said the following day. The bank has missed its inflation target for the last two years.

Inflation unexpectedly slowed to 10.6 percent in June from 10.7 percent a month earlier as grocery prices dropped. Still, pressure from energy costs remains and inflation is likely to accelerate in the next few months, the bank said on July 4.

Debt Redemption

Yields on Turkish domestic bonds fell last week. The yield fell 0.7 percentage point to 21.75 percent last week. The yield reached 22.80 percent on July 1, the highest since October 2006.

The Treasury will sell six-month and 12-month debt this week as it seeks to meet a total of about $36 billion in repayments in July and August, the heaviest in Turkish history. It faces redemptions of 13.6 billion liras this week.

The benchmark ISE-100 stock index rose 2.1 percent to 35,006.46 last week, the first week in six it's risen. The measure hit a two-year low on July 1 and has slumped 18 percent since March 14, when prosecutors filed a lawsuit to shut down the governing Justice and Development Party, accusing it of seeking to introduce Islamic Sharia law to secular Turkey. It's not clear when a verdict will be reached.

The government's statistics agency is due to publish April unemployment figures on July 15 and consumer confidence numbers on July 16.

The following is a list of important events in Turkey next week:

Event Date
Treasury to sell six-month debt July 14
April unemployment data July 15
Treasury to sell 12-month debt July 15
June consumer confidence July 16
Treasury to repay 13.6 billion liras July 16
Central bank base rate decision July 17

To contact the reporter on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net;