Turkey rate cut surprises markets

By Delphine Strauss in Ankara

Published: February 19 2009 23:37 | Last updated: February 19 2009 23:37

Turkey’s central bank cut its main borrowing rate by 150 basis points on Thursday evening, a much bigger step than markets had expected at a time when eastern European neighbours are considering raising rates to shore up their currencies.

Policymakers have now slashed Turkey’s benchmark borrowing rate by 525 basis points since November. The latest move takes it to a record low of 11.5 per cent. They also cut the lending rate on Thursday from 15.5 per cent to 14 per cent.

Analysts described the decision as “bold”, given the pressure on emerging currencies and Turkey’s delay in reaching an agreement with the International Monetary Fund that would boost investors’ confidence.

“This is a risky move, especially if one takes into consideration the risk of a contagion from the weakness of [central European] currencies. In this environment, the need for an IMF programme is even higher,” said Yarkin Cebeci, economist at JPMorgan.

The lira slid around 25 per cent against the dollar in 2008, mostly in the final months of the year, but has been relatively stable since the start of 2009, reflecting investors’ perception that Turkey is holding out relatively well in a troubled neighbourhood.

The central bank did not rule out further rate cuts, saying it thought inflation likely to “significantly undershoot target” at the end of the year. It said it would also take new measures to boost foreign exchange liquidity.

Policymakers were responding to growing signs of distress in Turkey’s economy, which most analysts expect will contract or at best stall in the year ahead. Recent figures show employment has hit a four-year high of 12.3 per cent , while industrial production has plunged with car manufacturers’ exports down as much as 60 per cent.

“We think that the policy rate should be lowered as much as possible this year,” said Tevfik Aksoy, economist at Morgan Stanley, arguing it would be the best chance to bring interest rates that have lingered in double digits to manageable levels in the longer term. But Turkey would also need to finalise an IMF deal and tighten fiscal policy immediately after local elections in March, he added.

Analysts at Unicredit said Turkey was among countries “in distinctly better positions” than many others in the region, adding that because domestic consumption was a big driver of growth, any scope for policy stimulus would be “especially precious”.

Copyright The Financial Times Limited 2009