Turkey Central Bank snips rate to satisfy Erdogan government

Fragile economy

Turkey's central bank on Tuesday shaved 75 basis points off its main interest rate, treading a fine line between retaining market credibility and placating calls by Prime Minister Recep Tayyip Erdogan for an aggressive cut to stimulate growth.
The Ankara-based bank's policymakers, led by governor Erdem Basci, pruned the one week repurchase rate to 8.75 percent from 9.5 percent but left the other rates unchanged, the bank said in a statement.
Economists warned that the cut -- more than the 50 basis points expected by the market -- risked fuelling inflation and putting further pressure on the Turkish lira as investors keep a wary eye on the insurgent takeover in parts of neighbouring Iraq.
The bank's monetary policy committee decided on a "measured decrease in the one-week repurchase rate considering the improvement in the global liquidity conditions in recent months," it said in a statement.
It kept its overnight lending rate at 12.0 percent and the overnight borrowing rate at 8.0 percent.
The bank also said the monetary policy stance would continue to be tight until a significant improvement in the outlook for inflation, which is forecast to be 7.6 percent at the end of the year.
The government has pressed the bank -- which is nominally independent -- for aggressive reductions that would boost growth as Turkey heads into August's presidential elections in which Erdogan is widely expected to stand.
On Monday, Economy Minister Nihat Zeybekci called for a sharp cut in the rates, saying that they should be lowered to the level of 4.5 percent at which they stood before January's aggressive rate hike to support the lira.
Industry Minister Fikri Isik said the central bank's decision was important but added that the government wanted more. "We are expecting more courageous steps," he said, quoted by local media.
Ali Cakiroglu, senior investment strategist at HSBC bank in Istanbul, said the bank "seemed to choose a balanced approach" by cutting the one-week repo rate.
But he warned that the bank's current monetary policy stance "poses risks to medium term economic outlook".
Financial commentator Ugur Gurses said the central bank's move was aimed at "satisfying the government".
"As far as I can see a cut by 75 basis points is a step taken to satisfy the government because a measured decrease would require a cut between 25 and 50 basis points," he said.
Deniz Cicek, economist at the Finansbank in Istanbul, warned that lowering the interest rate at a delicate time when insurgents are causing havoc in Iraq "will expose the currency at times of deterioration in risk perceptions".
Tensions have long been swirling around the central bank. Erdogan accused the bank of "kidding the nation" after a small cut in May but another camp, led by Finance Minister Mehmet Simsek, has put the emphasis on the bank's independence.
Numan Kurtulmus, deputy leader of Erdogan's ruling AKP, has added to the controversy by suggesting that the government should tackle the central bank's "domination", just as it drastically trimmed the once-untouchable army's sway over Turkish politics.
After rocky coalition governments in the 1990s and an economic meltdown in 2001, Erdogan's AKP has banked on steady high growth that reached nearly 9.0 percent in 2010, and won every election since it came to power in 2002.
But the economy has started to show fragility and official data showed last week that the Turkish economy grew at an annual rate of 4.3 percent in the first quarter of 2014.
With the latest cut, the bank "is trying to balance the need to maintain credibility in the markets on the one hand and government pressure to lower interest rates substantially on the other," economists at the Capital Economics consultancy said in a note to clients.
It noted that "the macroeconomic data provide little justification to ease policy".