Turkey cuts interest rates, resists pressure for bigger reduction

FE Team | Published: July 18, 2014 00:00:00 | Updated: November 30, 2026 06:01:00

.ISTANBUL, July 17 (Reuters): Turkey's central bank trimmed its main interest rate for a third consecutive month on Thursday but resisted the deep cuts sought by Prime Minister Tayyip Erdogan weeks ahead of a presidential election.
The bank cut its main one-week repo rate by 50 basis points to 8.25 per cent, saying global liquidity conditions were improving and the impact of a weak lira on inflation was tapering off. It has now cut the rate by a combined 175 basis points since its May meeting.
The central bank kept its overnight lending rate at 12 per cent but cut its overnight borrowing rate to 7.5 per cent from 8 per cent.
"More (rate cuts) could come if risk sentiment remains decent and the lira does not weaken further," said Anders Svendsen, chief analyst at Nordea.
Erdogan, in power for 11 years now, is keen to maintain growth before the August election, in which he is far and away the leading candidate, and parliamentary polls next year.
Erdogan sees a re-styled presidency as a platform for greater executive authority. His critics accuse him of amassing too much power, drawing on a vast majority in parliament, and of eroding checks and balances such as the judiciary - a trend also viewed with concern by the European Union that Ankara seeks to join.
Wedded to the idea that high interest rates cause high inflation, Erdogan has repeatedly called for sharp cuts to reverse the central bank's massive rate hike in January, when it was struggling to defend a tumbling lira.
He has accused a foreign-backed "interest rate lobby" of trying to undermine him and the Turkish economy.
His Economy Minister Nihat Zeybekci said again this month that the central bank should cut rates to support investment and production.
The lira firmed slightly after the rate cut to 2.1240 against the dollar from 2.1290 beforehand, while bonds and stocks were little changed.
"Today's decision actually is supportive for yields and equities and neutral for the lira ... but once a sell-off in emerging markets starts (whatever the reason is), Turkey might be the primary candidate to be sold off," Ozgur Altug, chief economist at BGC Partners, said in a note to clients.
The market had been pricing in a moderate cut. All 16 economists in a Reuters poll forecast a cut in the one-week repo rate, with 12 predicting a 50 basis point cut, three a 75 basis point cut, and one a 25 basis point cut.
Economists had said that looser monetary policy from the European Central Bank and a continued accommodative stance from the US Federal Reserve would give the Turkish central bank room to cut rates further.
But some economists said the inflation outlook did not justify a rate cut and warned that easier monetary policy could hinder the fight against rising prices and undermine the stability of the lira in the event of an adverse shock.
"There's an inescapable feeling that Turkey's central bank is setting itself up for another clash with markets once sentiment towards emerging markets assets turns - which it inevitably will at some point," said Nicholas Spiro, managing director of London-based Spiro Sovereign Strategy.