UPDATE:Turkey Central Bank Cuts Rates Again, S&P Upgrades Outlook

   By Christopher Emsden 
   Of DOW JONES NEWSWIRES 
 

Turkey's central bank on Thursday cut its benchmark interest rate further to 7.25% from 7.75% even as tentative signs emerged that the country's economy is stabilizing.

"Turkey still seems to be in the lower-for-longer camp," said Timothy Ash, chief emerging-markets economist for Royal Bank of Scotland.

Investors expected the latest rate cut, but also expect it to be last of a dramatic series as the central bank slashed its policy rate from 16.75% last November. Short-term debt markets point to a floor for rates of around 7%.

After contracting heavily in the first three months of the year, Turkish gross domestic product bounced back, expanding by around 5% in the second quarter alone.

However, more recent data suggest caution; while the jobless rate has ticked down, it remains above 13%. Meanwhile, capacity-utilization rates and consumer confidence both dipped in August, ending a steadily improving trend.

Indeed, demand was probably weaker in the third quarter, the Monetary Policy Committee of Turkey's central bank said in a short note that maintained the dovish tone adopted after past meetings.

But growth prospects are strong and challenge that tone, said Goldman Sachs economist Ahmet Akarli. He expects the central bank to have to begin hiking, and significantly, in the second half of next year.

Signs that the worst is past for the global economy, along with record-low interest rates set by central banks around the world, have produced a steep yield curve, with a striking gap between short- and longer-term market rates.

Turkey's curve is "extraordinarily steep," said Akarli, noting that it could prove hard for the central bank to push rates down much further without having a standby loan ready from the International Monetary Fund.

Rachel van Elkan, mission chief for Turkey at the IMF, said late Thursday she was "encouraged" by Turkey's medium-term fiscal plan, presented Wednesday, but noted that "it will (still) be necessary to adopt supporting measures and structural reforms."

Standard & Poor's broadly agreed with that assessment, calling the fiscal plan "modest" but saying it was "partly" the reason for its decision late Thursday to raise its outlook on Turkey's BB/B sovereign credit rating to stable from negative.

The rating agency's move was also driven by the reduction in Turkey's external financing risks, due in large part to the substantial narrowing in Turkey's current account deficit thanks to lower oil prices and sharp declines in imports, said S&P credit analyst Farouk Soussa. Some analysts cautioned that Turkish assets, along with the currency, could come under pressure given government plans to run hefty budget deficits over the next several years. Such troubles led to a drastic collapse in Turkish financial markets in 2001, prompting some analysts to be wary of the main ISE-100 equity index in Istanbul, which has doubled since March.

But "the Turkey of today is a different one to that of 2001, and a large primary surplus would not be healthy any more," said Simon Quijano-Evans, a strategist for Cheuvreux who remains optimistic about Turkish equities. He called the fiscal program "realistic" and expected Turkey's sovereign credit rating to be upgraded soon.

Meanwhile in Egypt, where inflation has slowed less convincingly than in Turkey during the downturn, the central bank on Thursday slowed the pace of its monetary easing, dropping its main rate to 8.25% from 8.5% after a series of half-point cuts earlier in the year.

-By Christopher Emsden, Dow Jones Newswires; +39-02-58-21-99-05; chris.emsden@dowjones.com

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(END) Dow Jones Newswires

September 17, 2009 13:49 ET (17:49 GMT)


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