Turkish Rate Cut Would Be ‘Risky Experiment,’ Aksoy Says

Dec. 15 (Bloomberg) -- A Turkish rate cut tomorrow would be a “risky experiment” that could jeopardize the central bank’s inflation goals, according to Morgan Stanley & Co. economist Tevfik Aksoy.

The monetary policy committee meets in Ankara tomorrow following a policy proposal from Deputy Governor Erdem Basci that has “triggered an expectation of a rate cut,” Aksoy, chief economist for the Middle East, Turkey and North Africa, said in an e-mailed report today. A cut would leave the lira vulnerable to any reversal in global risk appetite, he said.

Basci said that lower interest rates, combined with an increase in the reserves banks must park at the central bank, would help curb the widening in the current-account deficit and tame a surge in consumer lending. His comments, in a report published on the bank’s website, followed other statements by the central bank that the chances of a rate cut have grown.

A cut would be unorthodox, untested policy and is unlikely to happen this month, Aksoy said. “Given the fact that the economy is still growing quite fast and the credit expansion has yet to respond to recent hikes in required reserves, we believe that easier monetary policy would be a significant risk to the inflation outlook.”

The bank has held rates unchanged for a year and the guidance Governor Durmus Yilmaz issued in October is that there’s unlikely to be a change before late in 2011. The main one-week repo rate is 7 percent.

Yields on benchmark two-year bonds have fallen about 30 basis points since Basci’s proposal was published, and there’s a chance “that market pricing could actually force policy-makers to actually undertake such an action,” Aksoy wrote.

To contact the reporters on this story: Steve Bryant in Ankara at sbryant5@bloomberg.net;

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net.