Rate cuts signal Turkey may follow

Hurriyet Daily News with wires

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The European Central Bank, or ECB, kept its main interest rate unchanged at a historic low of 2 percent, while Bank of England and the Czech central bank continued slashing interest rates, increasing expectations that Turkey’s Central Bank will go further in cutting its main benchmark rate from under the current level of 13 percent.

The European Central Bank kept interest rates unchanged after four reductions since early October as officials gauge the severity of the recession before cutting borrowing costs again.

Policy makers meeting in Frankfurt yesterday left the benchmark lending rate at 2 percent. The ECB may cut the rate to a record low of 1.5 percent in March, according to a Bloomberg survey.

ECB President Jean-Claude Trichet has signaled a reluctance to follow the U.S. Federal Reserve in lowering rates to close to zero, even as Europe finds itself in the grips of its worst recession since World War II. At the same time, Trichet signaled as recently as Jan. 28 that the slowdown will probably force the ECB to act again next month.

"They really haven’t grasped the severity of the recession," said Laurent Bilke, an economist at Nomura International in London. "Rates should be at 0.5 percent. They should have used the room they have much more forcefully."

UK rate at historic lows

Separately, the Bank of England lowered its key lending rate by half a percentage point to 1 percent, the lowest since the Bank’s creation in 1694.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate to 1 percent from 1.5 percent. The U.K. economy will shrink the most since 1946 this year and faster than any other industrialized country, International Monetary Fund forecasts show. Prime Minister Gordon Brown’s government has given the central bank powers to spend up to 50 billion pounds ($73 billion) on bonds and commercial paper as interest rates lose their potency to aid economic growth.

"The global economy is in the throes of a severe and synchronized downturn," the central bank said in a statement. "Business and household sentiment in many countries has deteriorated. The supply of credit remains constrained."

The Bank of England has now lowered its rate by 4 percentage points since October. The U.S. Federal Reserve has reduced its key rate to a range between zero and 0.25 percent.

The bank said there is "a substantial risk" that inflation will fall too far below the 2 percent target even though rate cuts since October, a 20 billion-pound package of tax cuts, cheaper commodities and a sharp drop in the value of the pound are likely to provide "a considerable stimulus."

"The key is the line that credit conditions have tightened further," Brian Hilliard, chief U.K. economist at Societe Generale in London, told Bloomberg. "That’s the key emphasis for the government and the bank, they’ve got to continue to do things about it. And the asset purchase facility is the next button to press."

While the ECB has chopped 2.25 percentage points off its benchmark, the most aggressive easing in the bank’s 10-year history, it still has the highest rates among the Group of Seven industrialized nations.

Trichet said last week that the ECB’s next "important" meeting will be in March, suggesting it may resume cutting rates once it has its new quarterly economic projections. That wait-and-see approach is opening the ECB to criticism that it’s not acting fast enough to protect its economy.

"They are doing too little, too late," Nouriel Roubini, the New York University Professor who predicted the global financial crisis, said in a Bloomberg Television interview Wednesday. "They are making the situation worse."

Europe’s service and manufacturing industries contracted for an eighth month in January and confidence in the economic outlook fell to a record low. Spain’s industrial production plunged by 19.6 percent in December and in Germany, factory orders extended their worst slump on record.

The International Monetary Fund predicts the economy of the 16 euro nations will contract 2 percent this year.

Inflation, which the ECB aims to keep below 2 percent, is also slowing rapidly. The rate dropped to 1.1 percent in January, the lowest since July 1999 and down from a 16-year high of 4 percent just seven months ago.

In a separate development yesterday, the Czech central bank cut its key rate for a third consecutive time. The Prague-based Ceska Narodni Banka lowered the two-week repurchase rate to 1.75 percent, the lowest since September 2005, from 2.25 percent.

Eastern Europe’s economies are being battered by the global crisis, which curbs export demand while shutting off investment and credit.

The Czech koruna has lost 7.3 percent since the central bank last cut rates on Dec. 17. In the same period, the Hungarian forint fell 11.6 percent and the Polish zloty declined 13.1 percent. The Turkish Lira has lost 6.8 percent against the dollar in the same period.

The aggressive slashing policy by world’s central banks is increasing expectations that Turkey will follow suit, when the Central Bank meets Feb. 19.

Falling commodity costs and the global slowdown are depressing demand in Turkey and curbing inflation. The central bank lowered the key rate by 3.75 percentage points in the last three months to a record 13 percent, and there’s room for more reductions, Governor Durmuş Yılmaz said Jan. 26.

"Expectations of a rate cut are increasing," Bloomberg quoted Abdullah Kunt, head of fixed income at Global Securities. "Treasuries’ successful auctions in the past days showed the expectations about Turkey are positive and it confirmed investors’ buying appetite for Turkish debt."

Successful auctions

The Treasury’s sale of 18.3 billion liras ($11.1 billion) of bonds in two auctions this week exceeded the payment of 15.7 billion liras due Wednesday. More than half of the debt was bought by primary dealers including major banks and some government institutions in non-competitive bids.

Inflation slowed to 9.5 percent in January from 10.1 percent the month before, the statistics office in Ankara said on its Web site Wednesday.

Consumer-price data for January confirm that "the main trend for inflation is downward," the central bank said. The bank reduced borrowing costs as growth slowed to 0.5 percent in the third quarter, the least since Turkey emerged from a financial crisis in 2001.

"The central bank will continue to cut policy rates based on the underlying inflation dynamics and projected developments," wrote Cem Akyürek, an economist at Deutsche Bank in Istanbul. "We had penciled in another 100 basis-point rate cut for Feb. 19."