Turkey cuts lending rate to counter slowing growth

Turkey's Central Bank made a surprise 100 basis point cut in its overnight lending rate on Tuesday, pointing to an easing of problems over its weak lira and surging current account deficit for giving it room to spur growth.

The country's economy is expected to slow sharply this year after surging some 8 per cent last year and Tuesday's move marks a shift from towards a slightly more expansionary policy in line with global trends. The IMF has forecast growth of 0.4 per cent for this year, while the government expects growth of 4 per cent.

"The rebalancing process and the improvement in the current account deficit will continue in the forthcoming period," the central bank said in a statement.

The bank lowered its lending rate to 11.5 per cent from 12.5 per cent after its monthly monetary policy committee meeting, while keeping its overnight borrowing rate at 5 per cent. It also held its policy rate, the one-week repo rate, unchanged at 5.75 per cent.

"Recent data releases confirm that the rebalancing between the domestic and external demand is ongoing as envisaged," it said, adding, "Final domestic demand is decelerating while the contribution of net external demand to growth is increasing."

The bank also raised the upper limit of total funding from one-month repo auctions between February 24-March 29 to 6 billion lira ($3.44bn) from 5bn lira previously in a bid to lengthen maturities away from one-week repos.

Inflation in Turkey is just over 10 per cent, almost twice the bank's main rate, a reflection of the fact that the bank is managing monetary policy mainly through banking sector liquidity rather than simply through the benchmark interest rate.

But the bank said that from February, core inflation indicators were expected to follow a downward path due to favorable cost factors.

"The increased amount of funding through one-month repos and reduction in the upper end of the corridor implies an easing and again on balance we find the decision lira unfriendly," said TEB-BNP Paribas economist Selim Cakir.

The lending rate move triggered a weakening in the lira to 1.7555 against the dollar from 1.7490. The yield on the December 4, 2013 benchmark bond declined to 9.04 per cent after the statement from 9.12 per cent.

According to the latest twice-monthly central bank survey of economists' expectations, annual consumer price inflation is expected to end this year at 7.17 per cent, above an official target of 5 per cent.

Oyak Securities economist Mehmet Besimoglu said the lending rate cut came after a recent increase in fund inflows to emerging markets and would lower banks' funding costs and boost economic activity.

"Banks' funding cost will decline for a bit. This is also a step supporting economic activity because it is the upper limit of the interest rate corridor," he said.

Turkey's mix of a low policy rate, higher required reserve ratios and a wide gap between its borrowing and lending rates is aimed at countering a worryingly high current account deficit while balancing risks from its volatile lira currency.

The lira has rebounded 7 per cent against the dollar this year, in a recovery induced by the central bank selling billions of dollars through auctions and direct intervention after the lira lost 20 per cent over the course of 2011.

The central bank halted regular daily forex sales after its MPC meeting last month, saying its policy mix and changes in global markets were improving a problematic balance of payments.

It widened the interest rate corridor in October, raising the overnight lending rate from 9 per cent, in a move designed to rein in rising inflation expectations.

The bank's policy has helped keep Turkish growth strong over the past year while other economies wilted but has left many investors confused over the complex mix and left concerns over the prospect of a hard landing in 2012.