Turkish Bank Unexpectedly Cuts Key Rate to 17.25%

Sep 13, 2007 - Turkey's central bank unexpectedly lowered its benchmark interest rate by a quarter point, the first cut for more than a year, saying it expected global growth to slow, easing pressure on Turkish inflation.

The Ankara-based bank cut its overnight borrowing rate to 17.25 percent, according to an e-mailed statement today. All 21 economists surveyed by Bloomberg had forecast no change. The bank will release minutes of the meeting within a week.

Central bank governor Durmus Yilmaz had held the rate at the highest in Europe for more than a year, crimping domestic demand and reducing growth in the European Union membership candidate. Today's statement said that high borrowing costs would continue to slow inflation, bolstered by an expected global slowdown triggered by turmoil in credit markets.

"This is a risky move because they're assuming the impact of a slowdown in demand will be greater than any potential inflationary currency weakness," said Inan Demir, economist for Finansbank AS in Istanbul. "It's a signal that they think things are going in the right direction on the inflation front."

The Turkish lira was unchanged at 1.2636 to the dollar after the decision was announced. The lira lost more than 10 percent against the dollar between Aug. 8 and Aug. 16 as investors, worried about the scale of losses in the U.S. subprime mortgage market, reduced holdings of emerging market assets.

`Measured Lowering'

"Developments in the global economy will limit both domestic and external demand," the bank statement said. "Conditions have emerged for the start of a period of measured lowering."

Consumer inflation accelerated to 7.4 percent in August from a 37-year low of 6.9 percent in July, an increase the bank said was due to the 'temporary' impact of drought on grocery prices.

Higher lending costs have bitten into Turkish domestic demand and curbed growth. The economy grew 3.9 percent in the second quarter, the slowest rate since 2002, from 6.9 percent in the previous three months. Private consumption fell in the quarter.

"Domestic demand has slowed significantly and has even turned negative," said Fatma Melek, Istanbul-based economic for lender Akbank TAS, Turkey's biggest company by market value. "Food prices may have pushed inflation up last month, but all the core indicators are pointing downwards."

The forecast for price-growth over the next 12 months fell to 6.27 percent in the bank's latest survey of businessmen and economists released on Sept. 7, from 6.37 percent in the previous survey two weeks earlier.

Demand is slowing after the bank increased its benchmark rate by 4.25 percentage points to 17.5 percent in June and July last year. The bank aims to slow inflation to a 4 percent target set under a $10 billion International Monetary Fund loan accord.

Turkey ended last year with inflation of double the target of 5 percent, the first time since 2001 that it has failed to beat inflation goals agreed with the IMF. The inflation rate has fallen from more than 70 percent at the start of 2002.