A Larger-Than-Forecast Turkish Rate Cut

July 16, 2009

The Central Bank of the Republic of Turkey cut its main overnight borrowing rate to 8.25% from 8.75%.  That was the third consecutive monthly reduction of 50 basis points and the ninth consecutive month in which policy was eased.  The cumulative decline equals 850 basis points, and more lie ahead.  At 8.25%, the new rate level exceeds on-year CPI inflation by 255 basis points, a very high inflation-adjusted interest rate in an economy where real GDP plunged 13.8% in the year to 1Q09.  A statement released by monetary officials predicted low inflation “for a long period of time.”  Positive growth may have resumed last quarter, but recovery prospects remain quite uncertain.  The central bank’s baseline forecast calls for a slow and protracted upturn.  The statement also mentioned that tight financial conditions have not gone entirely away.

Analysts had only expected a 25-bp rate reduction because the statement from June had envisaged future reductions being more measured.  Today’s statement deletes that qualification, replacing such with the following caveat: future cuts will be necessary in the “short term unless there is a robust recovery in economic activity.”  Before the 50-bp cuts in May and June, the key interest rate was slashed by 75 bps in April, 100 bps in March, 150 bps in February, 200 bps in January, 125 bps in December and 100 basis points last November 19th.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


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