Nov. 16 (Bloomberg) -- Turkey will probably reduce its benchmark interest rate this month and next before ending the deepest series of cuts among members of the Group of 20.

The bank in Ankara will lower its overnight borrowing rate by a quarter point to 6.5 percent on Nov. 19, all 26 economists surveyed by Bloomberg said. Fifteen of 23 economists said the bank will also reduce rates next month.

A further half-point reduction would bring cuts in the past 14 months to 10.5 percentage points, more than any of the other 50 central banks tracked by Bloomberg except Moldova. It would also likely take the benchmark below expectations for 12-month inflation, meaning real interest rates would be less than zero in a country that needs foreign investment to support the currency and government borrowing.

“There’s no sign of any sustained pick-up or recovery,” said Nicholas Kennedy, emerging-market strategist at 4Cast Ltd. in London who expects two quarter-point reductions before the bank calls a halt. “It’s difficult to see where any inflation pressure will come from.”

Gross domestic product shrank 7 percent in the second quarter from the same period a year ago after contracting a record 14.3 percent in the previous three months, as demand collapsed in European markets where automakers such as Ford Otomotiv Sanayi AS sell their products. The economy may shrink 6.5 percent this year, the International Monetary Fund says. That would be the deepest decline since World War II.

Historic Lows

Central Bank Governor Durmus Yilmaz said on Oct. 27 that with inflation at historic lows and a wide output gap, which measures the difference between potential and actual output, there’s room for “limited” further cuts to the benchmark rate. Inflation slowed to a 39-year low of 5.1 percent in October.

The bank predicts that inflation will end 2010 at 5.4 percent, while the economists and businessmen it surveys every two weeks forecast a rate of 6.3 percent in 12 months time.

The bank’s cuts have helped drive yields on lira- denominated government bonds to about 8.7 percent from more than 22 percent a year ago. That’s helped boost profits at banks such as Akbank TAS, part-owned by Citigroup Inc., whose third-quarter net income almost doubled from a year earlier.

Still, bond yields have risen from their historic low of 7.89 percent on Oct. 8.

“My sense is that investors are now a little more cautious about Turkey and real interest rates are already very low,” said Beat Siegenthaler, chief emerging-market strategist at TD Securities Ltd. in London, who expects this month’s cut to be the last. Turkey “is not a developed country in the sense that it can only focus on the output gap.”

The series of cuts has been “very impressive, a fantastic achievement but they shouldn’t overdo it.”

The following is a list of events in Turkey this week:

Event                          Survey     Prior        Date
Oct. Consumer Confidence                   81.9
Nov.16
Aug. Unemployment                          12.8%
Nov.16
Base Rate                        6.5%       6.75%
Nov.19

To contact the reporter on this story: Ben Holland in Istanbul at bholland1@bloomberg.net.

Last Updated: November 15, 2009 17:01 EST