Rate Cut Chorus Grows Louder as Lira Regains Mojo: Turkey Credit

There haven’t been so many economists anticipating an interest-rate cut by Turkey’s central bank since May last year.

While the median estimates in Bloomberg surveys of economists suggest that Governor Erdem Basci will keep his three main rates unchanged today, six out of 14 analysts predict a reduction in the 12 percent overnight lending rate, the top end of his corridor. It would be the first cut since Basci raised borrowing costs in January, spurring the second-best two-year note rally in emerging markets.

Trimming the corridor would help Basci preserve gains by the lira and government bonds amid an easing of political tensions following March elections, according to Piotr Matys at 4Cast Ltd. Basci signaled last month that he may take measured steps to cut rates after Prime Minister Recep Tayyip Erdogan urged him to ease monetary policy to stimulate economic growth.

“Recent comments from Basci and the bank clearly indicate that policy makers are looking for the opportunity to unwind somewhat excessively tight monetary policy,” Matys said in e-mailed comments on May 20. “By cutting the upper level of the corridor, they can test the markets and satisfy politicians.”

Economists lowered their growth forecasts for 2014 after the January rate increases, estimating expansion of 2.3 percent in a Bloomberg survey in April, down from 4 percent five months earlier.

Corruption Turmoil

Basci’s January move came after a corruption investigation ensnared Erdogan’s government and pushed the lira to a record low against the dollar. The governor began hinting he may ease monetary policy after Erdogan’s victory in March 30 local elections diminished fears of deepening political instability.

Turkey’s inflation rate jumped to 9.4 percent last month, exceeding forecasts. Basci said April 30 that a cut in interest rates shouldn’t hurt price expectations, and is possible provided that a recent fall in the country’s credit risk holds.

Turkey’s sovereign risk measured by five-year credit-default swaps has fallen 17 basis points since then to 185, extending declines since the January rate increases to 72 basis points.

Ozan Gaziturk, the chief economist of Sekerbank in Istanbul, said a cut to the overnight lending rate would “prevent the lira from excessively strengthening.”

Lira Gains

The currency has gained more than 10 percent, the most among emerging markets, since the bank announced its emergency rates meeting in late January. It strengthened 0.1 percent to 2.0931 per dollar at 9:39 a.m. today. The yield on two-year lira notes has fallen almost 2 percentage points in the same period, the biggest drop after Cyprus, to 9.07 percent.

Some economists urged the central bank to show caution. Increasing appetite for riskier emerging-market assets is behind the rally in the lira and bonds, Ipek Ozkardeskaya, a currency strategist at Swissquote Bank SA in Geneva, said by e-mail yesterday.

“Turkey’s economic conditions, including inflation expectations, do not warrant a rate cut at the moment,” Ozkardeskaya said.

Even with inflation and expectations above the bank’s target, the improvement in credit-default swaps has given Basci some “room for maneuver,” Ibrahim Aksoy, chief economist at Gedik Investment in Istanbul, said by phone yesterday.

In the absence of significant lira depreciation, “I see the odds of a rate cut above 50 percent,” Aksoy said.

To contact the reporter on this story: Onur Ant in Ankara at oant@bloomberg.net

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net Mark Williams, Ben Holland

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