Turkish Central Bank Cuts Main Rate; Yields Drop to Historic LowSelcuk Gokoluk
Turkey’s central bank cut the benchmark interest rate by a more-than-expected 50 basis points, sending bond yields to a record low.
The bank in Ankara cut its benchmark one-week repo rate for the first time this year, reducing it to 5 percent from 5.5 percent. The median estimate of 13 analysts at a Bloomberg survey was for a reduction of 25 basis points.
Explaining the decision, the central bank said capital inflows have accelerated again while loan growth is hovering above its preferred rate of 15 percent. Governor Erdem Basci has said he will seek to prevent appreciation in the lira that would widen the country’s current-account deficit. The bank said today that the “proper policy” is to keep interest rates low while increasing foreign-currency reserves.
“By this move, the central bank is saying that it is a bit more worried about the outlook for growth,” Timothy Ash, an emerging market economist at Standard Bank Plc in London, wrote in an e-mailed note. The central bank had previously seemed “relatively hawkish/bullish on growth,” he said.
The Ankara-based bank also said measures it took today to adjust rules on bank reserves will lead to a $1.4 billion increase in foreign-currency reserves.
Yields on two-year benchmark bonds fell 17 basis points to 5.58 percent at the 5 p.m. close in Istanbul, the lowest level since Bloomberg started tracking the data in April 2005. The lira sank 0.6 percent against the euro, heading for its biggest drop since March 7.
The central bank said the decline in commodity prices and its policy measures are expected to contain a widening in the current account deficit due to the revival in domestic demand. Weak global demand and commodity prices “contain the upward pressures on inflation,” it said.
Inflation accelerated to 7.3 percent last month, above the bank’s year-end target of 5 percent. The country’s current-account gap narrowed last year after reaching a record of about 10 percent of economic output in 2011.
Turkey’s central bank has cut at least one of the three rates in each monthly decision since September, as economic growth slowed to 2.2 percent last year from 8.8 percent in 2011.
The bank also cut both ends of its so-called rates corridor today, reducing the overnight lending rate to 7 percent from 7.5 percent and the overnight borrowing rate to 4 percent from 4.5 percent.
“If money inflows accelerate, and that’s what we expect, we may see much lower rates” at the bottom end of the corridor, Gizem Oztok Altinsac, an economist at Garanti Securities in Istanbul, said in an e-mailed note.
Danske Bank A/S was the only bank surveyed by Bloomberg that forecast today’s 50-point cut in the benchmark rate.
The lira’s 0.9 percent advance over the past month may have pushed it above a threshold cited by the central bank for rate cuts, according to Turk Ekonomi Bankasi AS.
The bank’s real effective exchange-rate index, which measures the currency against those of Turkey’s main trade partners, rose to 119.95 in March. A reading above 120 suggests the lira is overvalued and may prompt rate cuts, Basci has said.