Turkey cuts key rate as inflation slows

ISTANBUL – Reuters

Turkish Central Bank Governor Erdem Başçı.

Turkey’s Central Bank lowered its main interest rate by 50 basis points yesterday in response to slowing inflation and in the face of increased political pressure for softer monetary policy before a June parliamentary election.

Last week President Tayyip Erdoğan warned he might summon central bank officials if they did not respond to his repeated calls for lower rates to boost growth.

The bank cut its one-week repo rate to 7.75 percent while leaving unchanged its overnight lending rate at 11.25 percent, its primary dealers’ overnight borrowing rate at 10.75 percent and its overnight borrowing rate at 7.50 percent.

“It’s hard to say (the rate cut) is just due to political pressure because there was a downside surprise in inflation in December,” Finansbank economist Gökçe Çelik said.

“But the comments from government are damaging the credibility of the Central Bank. Even if they (the bank) did it for economic reasons, that’s not what it looks like from outside.”

Bolstering economic growth would improve the ruling Justice and Development Party’s prospects of winning a two-thirds majority in June and thereby make it easier for Erdogan to build a strong executive presidency.

Of 20 economists polled by Reuters, 11 had expected a cut in the main rate, with eight forecasting a quarter of a percentage point reduction and three anticipating a 50 basis point cut.

The Central Bank’s battle against inflation, even as the economy slows and conflict continues in neighboring countries, has been helped by the slide in global oil and commodity prices.

Tuesday’s decision came after data showed annual consumer price inflation eased to 8.17 percent in December from 9.15 percent in November. The latest Central Bank survey of business leaders pointed to end-2015 inflation of 6.82 percent, still above the 5 percent target.

‘Measured moves’

The Central Bank described yesterday’s move as “measured” and said it would keep its overall monetary policy tight until there was a significant improvement in the inflation outlook.

The lira, which hit a record low against the dollar in December, firmed to 2.3290 after the announcement from 2.3405 beforehand. Traders said investors were relieved that the bank had not cut more deeply, given the political pressure.

After hiking rates sharply last January to halt a slide in the lira, the bank cut rates four times from May till August.

Growth slowed to 1.7 percent year-on-year in the third quarter, below a Reuters forecast of 3 percent, indicating the government would not meet its 4 percent full-year target.