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Turkey Cuts Rates First Time in 7 Months as Economy Slows

Turkey Cuts Rates First Time in Seven Months as Economy Slows
Economic growth in Turkey has slowed from last year’s 8.5 percent, the second-fastest among the Group of 20 developed economies after China. Photographer: Kerem Uzel/Bloomberg

Turkey’s central bank cut interest rates for the first time in seven months in response to lower-than-forecast inflation and slowing economic growth.

The bank in Ankara reduced its overnight lending rate, the top end of its interest-rate corridor, by 150 basis points to 10 percent, according to its website. Six economists surveyed by Bloomberg had expected a 100 basis-point reduction. The bank held its benchmark one-week repo rate at 5.75 percent, in line with forecasts. It’s the first change in the corridor since a cut of 100 basis points to the top rate in February.

Central Bank Governor Erdem Basci varies rates within the corridor on a daily basis to balance above-target inflation, a slowing economy and a volatile currency. Economic growth slowed to 2.9 percent in the second quarter, below the government’s year-end target of 4 percent. That has encouraged Basci to favor the lower end of the range in recent weeks, pushing bank funding costs to a three-month low.

The bank signaled further reductions, saying it may make a “similar measured step in the coming period” as domestic demand is moderate and inflation set to slow. It also warned that increases in energy prices require a “cautious stance.”

The central bank also adjusted reserve requirements for banks’ lira liabilities, allowing them to keep a larger ratio in foreign exchange. It said that the measure will add $3.6 billion to foreign currency reserves, and that further such steps may follow.

Currency ‘Pressure’

“The central bank feels confident about inflows,” and the lower rate won’t “place any pressure on the currency,” said Sengul Dagdeviren, chief economist at ING Bank AS in Istanbul. The central bank’s decision may have been influenced by “recent injections” by the European Central Bank and the U.S. Federal Reserve, she said.

At 8.9 percent, inflation remains above the bank’s target of 5 percent and year-end estimate of 6.2 percent. The bank said today that it expects a clearer drop in inflation in the fourth quarter, though it said increases in energy prices require a “cautious stance.”

Economic growth in Turkey has slowed from last year’s 8.5 percent, the second-fastest among the Group of 20 developed economies after China.

Bets that the bank would cut rates have helped push yields on benchmark two-year bonds down more than 40 basis points in the past month. The debt was trading at 7.32 percent at 4:20 p.m. in Istanbul, little changed from before the bank’s announcement. The lira was also little changed at 1.7990 per dollar.

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