Turkish Central Bank Unexpectedly Cuts Benchmark Rate

Turkey’s central bank unexpectedly cut its benchmark interest rate today because of a drop in the country’s “risk premium indicators.”

Policy makers led by Governor Erdem Basci cut the one-week repurchase rate by half a percentage point to 9.5 percent, according to a statement. The Ankara-based central bank kept its overnight lending rate at 12 percent and the overnight borrowing rate at 8 percent. The median estimate of economists surveyed by Bloomberg was for all three rates to remain on hold.

Basci signaled last month that he may take “measured steps” to ease access to credit. Policy makers have been under government pressure to lower borrowing costs after raising rates in January to halt a run on the lira. Since then, Turkish bond yields and the cost of insuring its debt have plunged.

“With the recent decline in uncertainties and improvement in the risk premium indicators, market interest rates have fallen across all maturities,” the central bank said today.

Turkish markets were hit by a combination of domestic politics, as a corruption scandal threatened to weaken Prime Minister Recep Tayyip Erdogan’s government, and a global retreat from emerging markets. The central bank’s rate increase in January halted the rout, and Erdogan’s victory in local elections in March helped turn it into one of the world’s strongest bond and currency rallies.

Not Suitable

Turkey’s sovereign risk measured by five-year credit-default swaps has fallen 73 basis points since the rate increase to 183 today, according to data compiled by Bloomberg. The currency has gained about 10 percent since the bank signaled its rate increase in late January. It extended gains today, adding 0.1 percent to 2.0921 per dollar at 3:40 p.m. local time.

The yield on two-year lira notes has dropped almost three percentage points in the past two months. It fell 22 basis points to 8.88 percent today.

Some economists have argued that with inflation almost double the central bank’s 5 percent target, it’s premature for Basci to start reversing January’s increase.

“We do not believe that macro conditions are suitable for such policy action,” Ipek Ozkardeskaya, a currency strategist at Swissquote Bank SA in Geneva, said by e-mail after the decision.

Only two out of 15 economists in the Bloomberg survey predicted a cut to the one-week repo rate. Six expected the bank to lower the overnight lending rate, the top end of Basci’s rates corridor.

‘Space to Tighten’

“It appears that the central bank of Turkey is maintaining policy flexibility here by keeping the lending rate elevated at 12 percent,” Abbas Ameli-Renani, an emerging-markets strategist at Royal Bank of Scotland Group Plc in London, said in an e-mailed note. The move gives the bank “plenty of space to tighten liquidity, if needed, in the onshore repo market without having to change rates.”

The central bank said its policy stance will remain tight even after today’s cut, and will stay that way “until there is a significant improvement in the inflation outlook.”

Turkey’s rate-corridor policy allows the bank to adjust policy on a daily basis, and it was already easing monetary conditions even before today’s decision, said Selim Cakir, an economist at Turk Ekonomi Bankasi AS in Istanbul, who forecast today’s policy-rate cut.

The overnight rate on inter-bank markets, which started the week above 11 percent, will now probably settle around the 9.5 percent policy rate, Cakir said. The bank’s reasoning and the fact that it kept the boundaries of the corridor unchanged suggests it’s “unlikely to resort to further easing from this point on,” he said.

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