Central Bank cuts key rate to record low

Hurriyet Daily News with wires

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Ankara-based Central Bank reduced its overnight borrowing rate to 10.5 percent, a record low, Thursday. The reduction matched the median estimate of 18 economists surveyed by Bloomberg. The Bank will release minutes of the meeting within eight working days.

Thursday’s cut means the Bank has shorn 6.25 percentage points from the benchmark rate in the past five months, joining policy makers globally in slashing the cost of borrowing as the global credit crisis bites. Industrial production declined an annual 21.3 percent in January, the most since records began in 1986.

"The economic growth outlook is absolutely dismal, unemployment is rising and I can’t see inflation coming from anywhere," Tim Ash, head of research for central Europe, the Middle East and Africa at Royal at Royal Bank of Scotland in London told Bloomberg. "The Central Bank may possibly lower the rate below 10 percent this year."

The Central Bank may continue with "measured" rate cuts as lower oil and commodity prices are supporting a drop in the inflation rate, the statement issued by the Bank said. The inflation rate may jump temporarily in March because of higher unprocessed food prices, the Bank added. Inflation eased in February to 7.7 percent, the slowest pace in a year and a half. The Bank’s fortnightly survey of businessmen and economists on March 9 showed expectations for inflation in 12 months time dropping to 6.7 percent from 6.88 percent, below the Bank’s goal of 7.5 percent for the year-end.

Unemployment rose to 13.6 percent in the three months through January, the highest in at least four years. The economy grew 0.5 percent in the third quarter, the slowest pace in six years.

The economy is now believed to be heading into recession this year as the global financial crisis batters both exports and domestic demand, reported Reuters. Analysts warned the latest cut could add further pressure on the currency after recent weakness.

"They have indicated they wanted to keep the currency stable by re-launching foreign currency selling auctions so continuing to cut rates aggressively against that backdrop seems a risky strategy," said Standard Chartered economist Manik Narain.

Analysts also said further rate cuts could harm the already ailing Turkish Lira in the absence of a new loan accord with the International Monetary Fund, or IMF.

"There is still IMF uncertainty and fiscal policy is unsupportive of further rate cuts, so there's not a lot of room going further," said Dresdner Kleinwort economist Özlem Arpaç. Meanwhile, the Central Bank cut the maximum interest rate banks may charge on late credit card payments to 3.96 percent monthly from 4.39 percent, CNN Türk reported Friday, without saying where it got the information.