Declaration of war against recession

Hurriyet Daily News with wires

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Encouraged by global interest rate cuts and the pressing need to stave off looming recession, Turkey’s Central Bank surprised markets once more, by slashing its benchmark rate a whopping 1.25 percentage points. The cut takes the rate down to 15 percent.

The first surprise came Nov. 19 when the Bank cut its benchmark overnight borrowing rate half a percentage point to 16.25 percent, despite expectations that it was going to keep it at 16.75 percent.

Thursday evening’s reduction was the largest rate cut since December 2004, when the bank lowered the rate by 2 percentage points. The decision displayed the desire to steer the economy away from recession. The $660 billion economy recorded only 0.5 percent growth in the third quarter, as global and domestic demand wanes. The gross domestic product is widely expected to post negative growth in the last quarter.

The decision was welcomed by the government, as two ministers expressed their satisfaction. State Minister Kürşad Tüzmen, dubbed the "voice of exporters," said the rate cut is compatible with the rest of the world. "One would wish that such reductions were made earlier," Anatolia News Agency quoted him as saying.

"This is the way to go for the Central Bank," said Zafer Çağlayan, the Minister of Industry and Trade. "Falling interest rates would help domestic consumption."

Central banks are lowering interest rates worldwide as falling commodity prices and a recession in the U.S., Japan and the euro region damp inflation. The most dramatic move came last week, as the U.S. Federal Reserve cut its target rate to "a range of zero to 0.25 percent." The Bank of Japan cut its key policy rate Friday to 0.1 percent from 0.3 percent. Also Friday, Denmark’s central bank cut its key interest rate by half a percentage point to 3.75 percent. The European Central Bank cut its key rate by 0.75 percentage point to 1.5 percent Dec. 4.

"We are in extreme times globally and the bank’s action reflects this," said Tim Ash, chief of emerging markets research at the Royal Bank of Scotland in London. "They have clearly been very dovish for a long period of time."

Until the program with the IMF, becomes clear, such rate cuts would continue, according to Fortis Turkey’s "Glokal Stratejist" newsletter. FinansInvest Research, meanwhile, said it expects the Bank to "cut rates by a further 2 percent É by the end of next year."

Easing inflation
The global credit crunch made it necessary to cut rates as part of measures to protect the economy, the Central Bank said. Inflation eased to 10.8 percent in November, the slowest pace in five months. The Central Bank is targeting inflation of 7.5 percent next year.

"I think they’ll continue cutting," Bloomberg quoted Yarkın Cebeci, an economist at JPMorgan Chase in Istanbul, as saying. "The bank is concerned about É growth and is encouraged by the absence of any inflationary pressures." The economic slowdown and a weaker currency prompted the government to begin talks with the IMF on a new economic program to replace a $10 billion accord that expired in May. A delegation from the fund is due in Ankara early next month.

The central bank has taken a series of measures to help free up liquidity for lending by banks to businesses and consumers. It lowered the level of reserves banks must deposit against foreign currency accounts to nine percent from 11 percent Dec.5, freeing up $2.5 billion.

Turkish bonds rose and the lira, or YTL, fell after the Central Bank’s decision. Turkey’s lira-denominated government bonds gained for a third day, sending yields down 62 basis points to an eight-month low of 17.12 percent at 11:15 a.m. in Istanbul Friday, based on the average of securities tracked by ABN Amro Holding. The U.S. dollar was trading at around YTL 1.53 at 5:00 p.m. Friday.

"Bonds are rising because [the] rate cut exceeded market expectations," said Selim Gülkan, a trader at Türk Ekonomi Bankası. "It will wait to see the inflation data in January to price in further cuts." The yield may fall "for a while" to 16.20 percent, Gülkan said.

The cut "increases the risk of more weakness in the YTL, but this appears to be of lesser importance for the central bank currently," analysts Lars Christensen and Lars Rasmussen at Danske Bank in Copenhagen wrote in a note. "Going forward, we therefore expect the Bank to lower rates further as the economy sinks into recession."