Surprise Drop in Turkey GDP Risks New Rate Cut Pressure on Basci

A surprise contraction in Turkey’s economy in the second quarter means the government may intensify pressure on the central bank for lower borrowing costs to spur growth even as inflation hovers at near double the bank’s target.

“The central bank is now between a rock and a hard place,” Capital Economics economist William Jackson said by phone from London. “We’re going to see further pressure by the government on the central bank to lower interest rates. The inflation rate is high and rising.”

Turkey’s gross domestic product fell by half a percent in the April-to-June period from the previous quarter, missing estimates in a Bloomberg survey. Domestic demand, which makes up two-thirds of the gross domestic product, dropped as the cost of borrowing deterred consumers from spending.

The quarterly contraction exposes central bank Governor Erdem Basci to attacks from the government whose members have pushed policy makers to ease access to credit. Basci partially wound down an emergency rate increase he announced in January, only to see inflation accelerate to 9.5 percent in August from a target of nearly half that amount.

Annual GDP growth during the second quarter was 2.1 percent, compared to the 2.8 percent median estimate in a Bloomberg survey of 15 analysts. Households’ consumption shrank 1.5 percent from the previous quarter, according to a statement by Turkey’s state statistics institute. Basci’s January rate increase weighed on domestic demand during the period, Is Investment economist Muammer Komurcuoglu said in an e-mailed report after the release.

Basci said last month that he would keep access to credit “tight” until he sees a significant slow down in inflation. Turkey’s Economy Minister Nihat Zeybekci said last week that price gains could be curbed if the bank lowered rates instead, spurring investment in manufacturing.

The lira weakened after the data release and was trading 0.3 percent lower at 2.2033 per dollar at 2:28 p.m. The yield on Turkey’s two-year lira notes rose 2 basis points to 9.15 percent.

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