Currency may fall more

Bloomberg

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"It was a premature rate cut," Akarlı said in an interview late Thursday. "There will be very strong depreciation pressure on the YTL and Turkish economic growth will fall sharply. It's the wrong time to start easing rates."

Turkey's currency has fallen 29 percent against the dollar in the past three months as the global crisis prompts investors to pull money out of riskier emerging market assets.

Turkey is negotiating with the International Monetary Fund, or IMF, about a loan to help shore up the currency and meet its financing needs.

The Ankara-based bank lowered its overnight borrowing rate half a point to 16.25 percent Nov. 19, a decision predicted by none of the 20 economists surveyed by Bloomberg. The bank cited the weakest economic growth in more than six years and its expectations of slower inflation after oil prices declined.

Forecast of contraction
The economy expanded an annual 1.9 percent in the second quarter. It will contract in the second half of the year and in the first three months of 2009, Goldman forecasts. Growth will average 1.5 percent next year, Akarlı predicts, compared with the government's assumption of 4 percent expansion.

"Everyone is going through a painful adjustment and the Turkish economy will have to follow that," Akarlı said. "I'm not sure how much of an impact a 50 basis point cut will have on domestic demand. It is a failed rate cut."

The YTL will depreciate to 1.85 per dollar in three months, rebounding to 1.65 and 1.60 in six and 12 months respectively, Akarlı forecast.

Due to the currency's depreciation the bank will probably miss its inflation target of 7.5 percent for the end of 2009, he said. He forecast 9 percent price growth and a benchmark interest rate of 15 percent by end-2009.

An IMF loan agreement may help slow the YTL’s slump, he added. "IMF provides funding, helps ease pressure on the YTL and brings fiscal discipline," he said. "The Central Bank would have been better off with an IMF anchor in place and the case for easing would have been a lot stronger."