Turkey central bank cuts interest rates

ANKARA - Turkey's central bank on Tuesday cut a key interest rate hours after a new cabinet line-up was unveiled by the incoming prime minister, a loyalist of President Recep Tayyip Erdogan.
The central bank said the overnight lending rate was trimmed to 9.5 percent from 10.0 percent while its one-week repurchasing rate remained at 7.5 percent.
The overnight borrowing rate, at which banks lend to each other at the end of the day, was also kept intact, at 7.25 percent.
Tuesday's announcement came shortly after Turkey's incoming Prime Minister Binali Yildirim unveiled his new cabinet line-up, with most key ministers keeping their jobs, including Mehmet Simsek, deputy prime minister in charge of economy, which came as a relief to markets.
Investors had been closely watching the composition of the new cabinet amid speculation that market-friendly Simsek might be replaced by the president's son-in-law Berat Albayrak who, however, remained energy minister instead.
The markets reacted well to the news. The Turkish lira rallied against the dollar, which dropped to below 2.98 lira from around 3 before the announcement.
Simsek's continuing role "provided some relief for the markets," Deniz Cicek, economist at Istanbul's Finansbank, wrote in a note to clients.
"By easing concerns, Simsek's presence could help the government in limiting market reaction to its expansionary policies in the present fragile economic and political situation," she commented.
Ozgur Altug, chief economist at BGC Partners in Istanbul, also suggested that "from markets' perspective, the new cabinet appears to be broadly positive (or not as bad as feared) given the fact that Mr Simsek remains in the cabinet".
- 'Turquoise carpet'-
After the shock departure of former Prime Minister Ahmet Davutoglu amid a series of rifts with Erdogan, the Justice and Development Party (AKP) government has been keen to show a public front of unity and business as usual.
Yildirim, 60, an Erdogan loyalist, said the creation of a presidential system handing the president more powers was a top goal for his government.
William Jackson, senior emerging markets economist at London-based Capital Economis, said it seemed that the bank was "being influenced by demands from President Erdogan and his allies for "lower interest rates".
Erdogan has often pressured the nominally independent central bank to trim rates to trigger growth and investments, prompting criticism from economists warning a dramatic cut would push up inflation.
Jackson predicted that the pressure was likely to continue with Erdogan "apparently strengthening his own position in government following the appointment of a loyalist, Binali Yildirim, as prime minister."
In his first address to the AKP's weekly meeting in parliament on Tuesday, Yildirim said his government would prioritise the economy and investments.
"The economy is significant. The economy means banks, not money. The economy means to produce," he said.
"We will roll out a turquoise carpet to investors," he said.