The Central Bank makes historic cut

Hurriyet Daily News with wires

refid:10794437 ilişkili resim dosyası

Turkey's Central Bank reduced its benchmark interest rate by 2 percentage points, or 200 basis points, in a bid to avert recession after growth slowed to the weakest in six years and industrial output tumbled.

The overnight borrowing rate was cut to 13 percent, a record low for the European Union membership candidate, the Ankara-based Bank said late Thursday. The reduction was double the largest forecast in a Bloomberg survey of 20 economists. The Bank, which has also cut the lending rate to 15.50 from 17.50 percent, will release minutes of the meeting within eight working days.

"To put this into perspective, the market consensus was for 75 to 100 basis points in cuts. This just underlines that in many respects the Monetary Policy Committee, or MPC, seems to be thinking outside the box," Timothy Ash, the head of Central Eastern Europe and Middle East and Africa, or CEEMEA, research at the Royal Bank of Scotland told in a note to investors on Friday. "Indeed, [the committee] seems to have thrown away the box completely and is working on the design of a completely new receptacle."

"The MPC has made it clear in recent months that it is focused on growth, and is less concerned with inflation, and indeed with the pass-through from exchange rate weakening," Ash added.

"The near universal market 'economist' view of the latest cut is critical, arguing that the Central Bank is taking a high risk strategy, cutting real interest rates to worrying low levels and threatening a major Turkish Lira sell-off which could ultimately create a new inflationary splurge," he said.

Joining the global chorus
Thursday's lowering, the largest in four years, means the Bank has shorn 3.75 percentage points in three months, joining policy makers globally in slashing the cost of borrowing as the international credit crisis bites. Turkish growth slowed to its most sluggish in six years in the third quarter and industrial output fell by the most in seven years in November.

"The Bank really thinks demand is going to be totally absent and there will be no pressure on prices at all," said Tevfik Aksoy, chief economist for Morgan Stanley in Istanbul. "This is clearly a front-loading and it raises the question of whether there will be more cuts to come."

The Bank said it was bringing forward cuts that had been planned for "the coming months" in a bid to compensate for the tighter global financial conditions caused by the credit crunch.

"This statement showed that the Central Bank has less room for cutting the interest rates from now on," Fortis Turkey said in its "Equity Strategy for Turkey" newsletter. Revising its forecast slightly down to 12 percent from the previous 12.5 percent for the year-end, Fortis said it anticipates that the remaining 100 basis points will be cut in the upcoming one or two meetings.

Recent data show a "deepening slowdown" and indicate "the problems of the global economy will last for longer than previously thought," the Central Bank said in a statement accompanying its decision.

Turkish economic growth slowed to 0.5 percent year-on-year in the third quarter - its lowest rate in six years - in response to the global financial crisis and as both domestic and foreign demand slump. Capacity utilization fell to its lowest in at least nine years in December.

"This has shocked the market but the Bank will take comfort in the fact that the lira is relatively stable," said Beat Siegenthaler, chief emerging-markets strategist at TD Securities in London. "If this is front-loading, the question is whether there's any ammunition left."

Inflation in December slowed to 10.1 percent, the lowest rate in eight months. The Bank's fortnightly survey of businessmen and economists on Jan. 8 showed inflation is expected to fall into line with the Bank's goal of 7.5 percent at the end of this year.

Reaching the target
That target will probably be achieved around the middle of the year and an undershoot by year-end is increasingly likely, the Bank said Thursday. "Any possible future rate cut" depends on global events that are hard to predict, it said.

Turkish carmakers including Ford Motor's local unit Ford Otosan have suspended production as orders from home and the European Union slump. Ford Otosan said Thursday that it will temporarily halt production at its Kocaeli and İnönü factories in Turkey once again. Production at the factories will be suspended starting this weekend, lasting until Jan. 26. Domestic auto sales tumbled 58 percent in December from a year earlier, according to a distributors association.

"The [Central Bank] move is motivated by the fact that Turkey is seen in recession. Commodity prices are declining and that will help inflation fall below the central bank target this year," Manik Narain, an economist at Standard Chartered in London, told Reuters. "This could also be a sign that a new deal with the International Monetary Fund, or IMF, is imminent, as a new deal will help support the currency which would otherwise by hit by such a large rate cut," Narain said.

Turkey and the IMF are discussing a possible loan agreement to help buttress the economy against the slowdown. The two sides have been discussing a financial support arrangement since a previous $10-billion loan accord ended in May. Business leaders and financial markets have been clamouring for an IMF deal in order to boost the flagging economy.