Basci Cuts Turkey Rate First Time in 16 Months to Record Low

Turkey’s central bank lowered its benchmark interest rate today for the first time in 16 months to a record low in a bid to spur flagging economic growth and halt an appreciation of the lira.

The bank, led by Governor Erdem Basci, cut its benchmark one-week repurchase rate by 25 basis points, or 0.25 percentage point, to 5.50 percent, in line with the median of eight estimates in a Bloomberg survey. It kept its overnight borrowing rate, the bottom of its so-called rates corridor, at 5 percent and the overnight lending rate at 9 percent.

The reduction in the policy rate was the first since August 2011. That move extended a boom in consumer lending in the $800 billion economy that drove up demand for imports and boosted the current-account deficit to $77.1 billion by year-end, the second-highest figure worldwide, behind the U.S.

“Significantly lower-than-expected third-quarter growth, sharp deceleration in the consumer price index and fairly dovish comments from Governor Basci cemented expectations” for a rate cut, Piotr Matys, an analyst at 4cast Ltd. in London, said before the rate decision.

While Basci cut the average funding rate to a record low 5.58 percent Dec. 13 from 11.93 percent in January, that’s failed to prevent the economy from slowing. Growth in the third- quarter was 1.6 percent and quarterly growth has averaged 2.7 percent in the first three quarters of the year, down from 8.5 percent last year.

Poland, Sweden Cuts

Concern about the outlook for Europe’s economy has spurred other policy makers to cut borrowing costs this month. Sweden’s central bank earlier today cut its benchmark interest rate for a fourth time in a year as the largest Nordic economy succumbs to Europe’s debt crisis. The repo rate was lowered by a quarter point to 1 percent.

Poland’s central bank, the only one in the 27-nation EU to raise rates this year, cut borrowing costs on Dec. 5 and said it will ease policy further as the European Union’s biggest eastern economy faces the risk of its first recession in two decades.

In Turkey, “there is every reason for the central bank to ease the policy rate and the overnight borrowing rate,” Turker Hamzaoglu, an economist at Bank of American Merrill Lynch in London, said before today’s decision.

‘Ready to Act’

Basci implemented a rate corridor in October of last year that allows him to adjust interest rates on a daily basis. It was created to balance above-target inflation, a slowing economy and high volatility of the lira. Basci reiterated at a press conference in Antalya on Dec. 11 that policy would focus on the real effective exchange rate, or REER, against a currency basket of its main trading partners and said that recent cuts to the top end of the corridor and the average cost of funding would lead to a jump in growth in the fourth quarter.

“The central bank is ready to act to prevent substantial appreciation of the domestic currency that would have slowed ongoing rebalancing in the domestic economy,” Matys said.

Basci also said that if the REER rose to between 125 and 130, the central bank would work to reverse lira gains. The REER stood at 119.2 in November.

“The main target of the cut is the real effective exchange rate,” said Ozan Gaziturk, an economist at Sekerbank. He said that the bank would “react accordingly,” if the lira did appreciate. “We do not see a problem on the growth side -- assuming there is no global crash.”

The lira gained 0.2 percent to 1.7801 per dollar at 2:05 p.m. in Istanbul.

To contact the reporter on this story: David Neylan in Ankara at dneylan1@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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