FOCUS: Turkish Central Bank Cuts Interest Rates Again

   By Christopher Emsden 
   OF DOW JONES NEWSWIRES 
 

Turkey's central bank cut its benchmark interest rate by half a percentage point to 6.75% Thursday, continuing its aggressive easing policy in an effort to boost economic growth in the aftermath of the global financial crisis.

Dropping inflation expectations, along with bleak prospects in the labor market, suggest that Turkey's rate-cutting cycle, which began with the policy rate at 16.75% last November, isn't over.

Turkey's ongoing economic recovery will be gradual and protracted, the central bank's monetary policy committee said. However, it added that it would consider slowing down the pace of cuts at the next meeting "depending on the economic data and developments."

Most analysts had expected this latest rate cut, and also another in November that could be its last reduction.

"Although the bank has signaled that it may consider a slowdown in the pace of monetary easing, its stance remains decidedly dovish," said Neil Shearing and David Oxley, emerging European economists at Capital Economics in London. "....We see room for another rate cut, taking them to 6.5% by the end of year."

Goldman Sachs economist Ahmet Akarli agrees: "We expect a final 25 basis points cut to 6.5% in November."

Two emerging factors suggest that Turkey may be poised to benefit from lower borrowing costs even as its economy stages a recovery.

First, conciliatory statements by Prime Minister Recep Tayyip Erdogan have stoked speculation that the government is close to a loan agreement with the International Monetary Fund that could be worth up to $45 billion.

"There are reasons for cautious optimism for a sizable IMF arrangement," said Ilker Domac, an economist for Citigroup in Istanbul.

The government is also mulling a plan to forgo the IMF's help and boost the privatization of state assets - including coveted electricity distribution companies - and extend an amnesty allowing Turks to repatriate savings held abroad, both of which would lift domestic liquidity and the Turkish lira, according to a report from local daily The Star.

Many analysts expect that an IMF safeguard would trigger a ratings upgrade for Turkey, which would probably lead to lower risk premiums on the market yields of government debt. The central bank has explicitly said lower risk premiums would allow for an extension of its rate-cutting cycle.

The prospect of further rate cuts, as well as relatively hefty nominal yields, are also likely to buoy the Turkish lira against the U.S. dollar, according to Domac.

Meanwhile, a strong euro would be good news for Turkey in particular, because it would bolster the competitiveness of its manufacturing sector with respect to Europe, said Charles Robertson, chief emerging-markets analyst at ING in London.

A weak dollar and strong euro also stand to help nearby Egypt and the entire Middle East region, providing a critical growth channel for Turkish companies, he said.

While the government, the IMF and almost all economists expect Turkish gross domestic product to expand smartly next year, weak data for capacity utilization in the industrial sector, which fell back to 68.4% in September from 70.8% in August on a seasonally adjusted basis, highlight challenges on the employment front.

Turkey's jobless rate has been stuck at around 15% all year, and the central bank has emphasized that it has yet to see any significant improvement in labor markets despite other signs of an economic upswing.

Turkey's central bank will release minutes from Thursday's Monetary Policy Committee meeting in 10 days.

Central bank Web site: http://www.tcmb.gov.tr/yeni/eng/

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

(Clare Connaghan in London contributed to this article.)

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(END) Dow Jones Newswires

October 15, 2009 14:17 ET (18:17 GMT)


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