Turkey Central Bank resists vehement Erdogan pressure
Turkey's central bank shaved half a percentage point from its key interest rate on Thursday, resisting vehement pressure from Prime Minister Recep Tayyip Erdogan for more aggressive easing ahead of presidential elections in August.
But economists warned that even the relatively modest cut -- the third reduction in a row by the bank -- was a risky move in a country with high inflation and a substantial current account deficit.
The bank cut its one week repurchase rate to 8.25 percent from 8.75 percent, saying that a "measured cut" was appropriate in the current economic situation.
The bank also lowered overnight borrowing rate from 8.0 percent to 7.5 percent, while keeping the overnight lending rate at 12 percent.
But it was not clear if the relatively modest cut will be enough to satisfy Erdogan, who has demanded sharper reductions to stimulate growth as he prepares to stand in the presidential polls.
The central bank -- which is nominally independent -- had sharply raised key rates in January in response to a steep drop in the lira that had threatened a currency crisis.
In January, the bank raised the one-week repurchase rate from 4.5 percent to 10 percent. Erdogan's supporters in the government have called in recent weeks for the rates to be slashed back again.
But the bank indicated that the time was not right for an aggressive cut to pre-January levels and it still had its eye on inflation.
"Inflation expectations, pricing behaviour and other factors that affect inflation will be closely monitored and the tight monetary policy stance will be maintained," it said.
Annual inflation dropped to 9.16 percent in June, from a two year high of 9.66 percent in May.
But the bank also justified the economic rationale behind the decision to cut, saying that the "adverse impact of exchange rate developments since mid 2013 on annual inflation is gradually tapering off."
The Turkish lira strengthened slightly against the dollar after the announcement, trading at 2.12 lira to the dollar.
Muhammet Mercan, senior economist at ING Bank in Turkey, said that the cut was in line with market consensus although it might not please the government.
He forecast that the rate cut policy was "nearing an end because indicators show inflation will remain high."
He said: "There must be visible improvement in inflation outlook for any further cuts but we will see a clear picture when the central bank announces its inflation report next week."
Ali Cakiroglu, senior investment strategist at HSBC in Turkey, said the central bank hinted that it would press ahead with the rate cut policy but added it would not be sustainable because of a high risk of inflation.
"Inflation is still hovering above the inflation targets, and the expansionary monetary policies increases the likelihood of a reversal in the positive course in Turkey's external balances," he said.
In April, the central bank revised its year-end inflation prediction upwards to 7.6 percent from a previous forecast of 6.6 percent.
At its last meeting on June 24, the bank had cut the benchmark rate by 75 basis points -- following up on a 50 basis point cut in May, a move that met with only a very lukewarm approval by the government.
William Jackson, ecomomist at Capital Economics in London, said that the bank's argument was not convincing because "underlying price pressures in the economy are stronger than it acknowledges."
As a result, "inflation is likely to remain stubbornly high," he wrote in a note to clients.
He said the bank was "now bowing to government pressure to lower interest rates" and predicted that the benchmark rate would fall to 6.50 percent this year but would be raised again next year.