Turkey Central Bank Pessimistic on Growth Seen Cutting Furtherby
Bank lowers key rate for seventh month by 25bps to 8.25%
Statement shows policy makers downbeat on growth outlook
The Turkish central bank cut a key interest rate for a seventh month to extend its longest easing cycle in at least six years, amid mounting signs that growth is losing steam as consumers keep a lid on spending.
The bank lowered the overnight lending rate by 25 basis points to 8.25 percent, it said in a statement, matching the median estimate in a Bloomberg survey. The one-week repurchase and overnight borrowing rates were kept at 7.5 percent and 7.25 percent respectively, also in line with economists’ forecasts.
In its announcement, the bank uncharacteristically focused on weakening economic activity, a departure from earlier statements that dwelt more on factors influencing price stability. Odeabank economist Sakir Turan saw this as a sign policy makers might loosen monetary conditions more aggressively if growth continues to disappoint.
“I don’t remember the bank portraying a growth picture like this in a very long time,” Turan said by phone. “The central bank is suggesting that it may begin lowering one week repo and overnight borrowing rates to support the economy, although we think the current inflation outlook doesn’t leave any room for that.”
A string of recent data suggest that July’s failed coup hurt domestic demand and manufacturing. President Recep Tayyip Erdogan has renewed pressure to spur growth by paring lending costs, and in a Twitter post on Thursday, a chief adviser, Bulent Gedikli, called on policy makers to reduce the one-week rate.
Current financial conditions “are tight,” the bank said.
Governor Murat Cetinkaya trimmed the overnight lending rate by 50 basis points at three consecutive meetings before the failed takeover, then halved the pace of cuts in its aftermath as financial markets grew more volatile. Consumer inflation slowed last month for the first time since April, giving policy makers more leeway to continue an easing cycle that’s the longest since the central bank adopted its triple interest rate corridor in 2010.
A Turkstat report this month showed domestic demand -- the main driver of Turkey’s economic growth -- weakened in the second quarter from the previous period. Other indicators, including the Markit manufacturing PMI, show economic activity was further hit by July’s events.
The government said Wednesday it will ease restrictions on borrowing to boost demand, including giving consumers more time to pay off some debt, including credit card purchases. The new measures will spur growth but have a negative impact on the current-account deficit and inflation, Deputy Prime Minister Mehmet Simsek said in an interview with NTV television before the interest rate announcement.
While falling demand will help to limit inflation, the government’s decision to raise taxes on gasoline and diesel prices will offset the impact, and “thus necessitate the maintenance of a cautious monetary policy stance,” the central bank said in the statement.
“Recently released data and indicators regarding the third quarter display a deceleration in the economic activity,” it said.
The “marked shift” in the tone of the rates statement is proof of rising growth concerns among policy makers who might “more aggressively” loosen liquidity going forward, Capital Economics Ltd. economist William Jackson said by e-mail.
Cetinkaya has said the rate cuts that began in March are part of a plan to simplify monetary policy, by narrowing the gap between the overnight lending and borrowing rates that make up the upper and lower bands of Turkey’s interest rates corridor.
The lira strengthened 0.2 percent to 2.9487 per dollar at 3:30 p.m. in Istanbul.