Central Bank takes unorthodox path to combat slower economy

ANKARA - Hürriyet Daily News

The Central Bank, governed by Erdem Başçı, will reveal the details of yesterday’s meeting in five business days. The bank has answered the government’s call for lower interest rates. AA photo

Amid fresh pessimistic data from the two engines of the country’s economy — the automotive and construction industries — Turkey’s Central Bank has pushed its interest rate corridor downwards, in a move expected to support growth while risking a boom in loan volume.

The bank’s Monetary Policy Council decreased the upper end of its rate corridor to 10 percent from 11.5 percent: a “radical” decision, some economists say, but good news for Economy Minister Zafer Çağlayan, who has been insisting on such a shift for months.

The Turkish Central Bank has chosen a flexible interest rate corridor over a fixed percentage, which has become a de facto benchmark. However, the bank yesterday held its policy rate unchanged at 5.7 percent. Parallel to the lowering of the upper end, the interest rate of primary dealer banks also reduced from 11 percent to 9.5 percent.

The decision came late, but is a positive one, according to Çaglayan. “I wish the Bank had recognized [the situation] and made a decision earlier. The fall in the interest rate is in harmony with our long-term investment policies,” he told journalists in Vienna yesterday. “This is what I said three months ago,” he said, adding that it was time for the Turkish economy to “take off” again, following efforts to cool it down.

‘Aggressive message’
The Turkish economy grew an impressive 8.5 percent last year, but many economists speculate that the government will not be able to reach its growth target of at least 4 percent of GDP this year, and Cabinet ministers have already spoken of it being missed slightly. The economy grew 2.9 percent in the second quarter of this year, which was below market expectations.

“As the Monetary Policy Council was expected to cut the upper end of the rate corridor by 100 points, the bank preferred a 150 point cut, for a more radical move,” the T-Bank Chief Economist Veyis Fertekligil, said in a note to investors yesterday, agreeing with many economists who forecast the bank might deliver further lending rate cuts in the coming months.

“It seems quite aggressive as a move. It’s going to be very bullish for fixed income. I am becoming much more nervous for the [Turkish Lira] ... clearly they are saying they don’t want a strong lira,” said Benoit Anne, head of emerging markets strategy at Societe Generale.

The bank’s unorthodox action may also pose risks, according to JCR Eurasia Rating Chairman Orhan Ökmen, who said in a note that the Central Bank’s priority is not economic growth. The lower interest rates might trigger inflation, he warned.

Another major inflation concern is in the area of energy costs, as the country is largely dependent on foreign oil and gas.

“The good thing for the Turkish lira is that the bank did not touch the lower end of the interest rate corridor, which was mentioned by some analysts,” said Özgür Altuğ, chief economist of BGC Partners in Istanbul. “The bank signaled that depending on the conditions, it might continue to deliver ‘measured’ actions ‘in the same direction.’ .. Since the bank did not touch the policy rate or the lower end of the corridor, we think the impact on the bond market will be limited.”