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Fitch: Turkish interest rate hike may reduce capital flow vulnerability but can damage growth.

January 31, 2014

Rating agency Fitch said in a non-rating commentary on Jan 29 that Turkish Central Bank's (CBRT) recent interest rate hikes reaffirmed its view that Turkish monetary authorities are ready to adjust their policy settings against short-term fluctuations in the domestic markets. CBRT's recent move may reduce the country's vulnerability against short-term capital outflows and also carries the ability to reduce the pressure on TRY and CBRT's forex reserves, according to Fitch. Fitch also commented that the recent interest hike can damage the country's growth prospects and can renew concerns on a hard landing. However, the recent devaluation in TRY and improvement in the country's export markets will have positive impacts on the country's net exports and current account deficit, according to Fitch. Fitch estimates that Turkey's current account deficit has exceeded 7% of GDP in 2013. CBRT's recent move also showed the monetary authorities independence and limitations of macroprudential measures to restrain current account deficit and inflation and also limitations of direct interventions to halt the devaluation in TRY, according to Fitch. Fitch rates Turkey at 'BBB-' with stable outlook and its rating and sector outlooks for Turkish banks are still stable. At an emergency monetary policy committee meeting on Tuesday, the Central Bank of Turkey raised its interest rates between 425 bps and 550bps. The Bank increased the upper end of the interest rate corridor (marginal funding rate) to 12% from 7.75%, overnight borrowing rate to 8% from 3.5%, one-week repo rate to 10% from 4.5%. The bank also raised the interest rate on borrowing facilities provided for primary dealers via repo transactions from 6.75% to 11.5%.

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Source: IntelliNews - Weekly Reports

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