Turkish Industrial Output Unexpectedly Shrank in August

Turkish industrial output unexpectedly shrank in August for the first time in almost three years, pushing this year’s growth target out of reach and adding further pressure on the central bank to lower rates.

Industrial production declined 1.5 percent from a year ago, the statistics office in Ankara said on its website, compared with a 3.3 percent increase in July. Output was expected to rise by 2.6 percent, according to the median estimate of 7 economists surveyed by Bloomberg. Production declined 2.3 percent from the previous month when adjusted for seasonality and working days.

Economic growth has been slowing in Turkey after the debt crisis in Europe worsened and the central bank tightened monetary policy to stem inflation and bank lending. Gross domestic product grew 2.9 percent in the second quarter, the slowest for more than two years. The decline has prompted the central bank to reverse course and lower borrowing costs, as some Cabinet members press for further action.

“This is the official goodbye to 4 percent GDP growth this year,” Turker Hamzaoglu an economist at Bank of America Corp. in London said in emailed comments. “Expect the minister of economy hitting the headlines soon blaming the Turkish central bank for being late in cutting rates.”

Yields on two-year benchmark bonds retreated 5 basis points to 7.63 percent at 11:30 a.m. in Istanbul. The lira declined 0.2 percent to 1.8147 per dollar.

Europe Impact

Speaking after the release of the figures, Deputy Prime Minister Ali Babacan said that the government expects growth of 3.2 percent this year. He also lowered the 2013 goal to 4 percent from 5 percent, and announced larger budget deficit targets for the next two years. Babacan said Turkey’s economy couldn’t escape the impact from Europe, its main export market.

Central bank Governor Erdem Basci, who varies borrowing costs on a daily basis, has pushed the average cost of funding for banks down by almost half since May. It’s now 5.8 percent, just 5 basis points above the floor of his so-called rate corridor.

Basci will probably respond by cutting the top end of the corridor by 1 percentage point to 8.5 percent at the next policy meeting on Oct. 18, said Emre Tekmen, an economist at TEB Invest in Istanbul, in an e-mailed note.

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