Turkey's central bank cuts main interest rate under Erdogan pressure

PanARMENIAN.Net - Turkey's central bank on Tuesday, Jan 20, cut its main interest rate for the first time in six months, after President Recep Tayyip Erdogan vowed to pressure the bank into relaxing monetary policy to boost growth, AFP reports.

The bank said in a statement after its latest monetary policy meeting that the one-week repurchase rate would be dropped to 7.75 percent from 8.25 percent.

The bank said in a statement that the "measured cut" was justified by an improving inflation outlook largely due to the fall in oil prices.

The marginal funding rate remained at 11.25 percent and the overnight borrowing rate at 7.50 percent. The last cut made by the bank to the one-week repurchase rate was also a cut of 0.50 percent back on July 17. Market consensus had been split on whether the rate would be cut or unchanged.

The central bank is nominally independent but this has not saved it from very public pressure from the tough-talking Erdogan for aggressive cuts to stimulate growth.

In one of his most bitter attacks yet on the widely-respected central bank chief Erdem Basci, Erdogan on Friday had vowed to "sit and talk" with the bank's leadership to press for a rate cut.

"Hey, central bank, what are you still waiting for?" Erdogan said. "They may now say the central bank is independent. I am also independent. I have to say this as the voice of the people."

A year ago, the bank had aggressively raised key rates to avert a major domestic economic crisis following a steep drop in the value of the the lira.

Despite a cycle of cuts over the summer, Erdogan has argued that the bank has been far too slow in pruning rates back to their former level.

Some economists, according to AFP, have expressed alarm that aggressive rate cuts as demanded by Erdogan could be dangerous with inflation still high.

Annual inflation in Turkey ticked up to 8.17 percent in 2014, slightly higher than 2013 and well over the central bank's medium-term target of five percent. But the bank said that under the current monetary policy stance, it "anticipates that inflation will decline to levels close to the target by mid-2015."

Economists at Finansbank in Istanbul said that while the bank appeared to be flagging more rate cuts further down the line "we think the room for further rate cuts is rather limited."

London-based consultancy Capital Economics argued the overnight marginal funding rate -- which was left unchanged at 11.25 percent -- has emerged as the most important interest rate in recent weeks and the cut was more of a cosmetic show of listening to Erdogan.

"This suggests that the cut in the one-week rate was largely presentational –- a response to government pressure to lower rates –- and that monetary conditions are likely to remain tight," it said in a note to clients.

"In this regard, there are reasons to think that the cut in the one-week repo rate may not mean much," it added, noting that currency markets had reacted relatively calmly to the move.

Economy Minister Nihat Zeybekci, an ally of Erdogan, said that the interest rate reduction was "not enough" and he was counting on the bank to make more cuts at future meetings.

Amid such views, markets are reassured by the presence in the cabinet of Deputy Prime Minister Ali Babacan who is seen as sharing the bank's position. Babacan was Tuesday accompanying Prime Minister Ahmet Davutoglu on a trip to London.

The Turkish lira lost 0.66 percent in value to trade at 2.34 Turkish lira to the US dollar in late afternoon trade.

The economic performance of Turkey, which has lagged recently following strong growth over the last few years, is under the spotlight this year as it holds the presidency of the G20 top world economies.