Interest rates to drop in Turkey, claims Deutsche Bank

Bloomberg

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The deal that the government is expected to sign with the International Monetary Fund, or IMF, should help maintain fiscal discipline and give the Central Bank more room for cutting rates from the current 15 percent, Akyürek wrote in a research note Monday. 3Our forecast had policy rates at 13.75 percent at the end of the third quarter of 2009, which we had pulled to end of the first quarter recently," Akyürek wrote. "Now we believe the Central Bank can go deeper, as we predict that policy rates will decline to 12 percent over the next four months."

The Ankara-based Bank lowered its benchmark rate by a total of 175 basis points last year to steer the economy away from recession during the global financial crisis. The economy expanded 0.5 percent in the third quarter, its slowest pace in six years, from 2.3 percent in the second quarter, prompting the government to seek financial support from the IMF.

Annual inflation in December eased to 10.1 percent, the slowest pace in eight months, from 10.8 percent the month before. The slowdown showed that falling demand was limiting the impact of a weaker lira, the Central Bank said, predicting that consumer-price growth will ease further in the coming months.

The lira lost 32 percent against the dollar last year as investors sold emerging-market assets on concern the credit crunch may deepen and speculation Turkey’s economy may shrink. "We are convinced that the Central Bank is planning to continue with rate cuts at as an aggressive a pace as they can while perhaps keeping an eye on the exchange rate and fiscal developments," Akyürek wrote. "Clearly, the sealing of the IMF deal will strengthen their hand and allow for deeper cuts."

A team of IMF experts will arrive in Turkey today to discuss a possible lending accord. The loan accord will be for between $15 billion to $30 billion, daily Yeni Şafak reported Monday, citing Economy Minister Mehmet Şimşek. Turkey and the fund are still in talks over the details of the lending program, which will cover all of the country’s external financing needs, Şimşek said in Ankara.