Central Bank lowers key rate to a new low

The Turkish Central Bank has cut its benchmark interest rate by three-quarters of a percentage point, its sixth consecutive reduction, as industrial output slumped and the number of jobless rose by more than a million.

The Ankara-based Central Bank lowered its overnight borrowing rate to a record 9.75 percent late Thursday. It had been forecast to cut the rate by half a point, according to the median estimate of 18 economists surveyed by Bloomberg.

The cut means the bank has shaved 7 percentage points from the benchmark rate in sixth months as it tries to minimize the impact of the global recession. Turkey’s economy contracted 6.2 percent in the fourth quarter of 2008, the first decline in seven years.

The bank’s move was "a bit more dovish than I’d expected," Bloomberg quoted Yarkın Cebeci, an economist for JPMorgan Chase in Istanbul. "They are pointing to another cut and it could be more measured than this one."

"We could get down to 8 percent this year," Reuters quoted Neil Shearing at Capital Economics as saying. "That depends on the condition of markets and a deal with the International Monetary Fund, or IMF, but if everything falls into place and there's fiscal discipline, interest rates could stay low for some time."

Future rate reductions will be "measured," the bank said in statement accompanying the decision, reiterating that the easing bias "may need to be maintained for some time."

The size of the cut suggests the bank thinks the "situation is even worse than it was when they met last month," said İnan Demir, an economist at Finansbank in Istanbul, speaking before the decision.

Way open for more
The Monetary Policy Committee, or MPC, statement accompanying the decision is "very dovish," suggesting that "the easing cycle may continue for sometime yet," said Timothy Ash of the Royal Bank of Scotland, in an email. "The MPC suggests that further rate cuts may be measured, essentially repeating the language from last month, albeit then it had appeared somewhat more balanced in terms of the outlook," Ash said. "The 10 percent level had been a key psychological level for the market for the bank’s policy rate, but on the back of this move, the market may begin to look to the sub-9 percent level this year."

Unemployment rose to 15.5 percent in January, the most since records began in 2005. The number of jobless jumped to 3.7 million from 2.6 million a year earlier.

Expectations for inflation in 12 months fell to 6.78 percent from 6.79 percent, the Central Bank said in its biweekly survey of economists and businessmen on April 9. Governor Durmuş Yılmaz is aiming for inflation of 7.5 percent at the end of the year.

Inflation accelerated to 7.9 percent in March from 7.7 percent in February after four months of decline.

Falling prices for oil and other commodities mean consumer-price growth may slow more rapidly in the coming months, the bank said in Thursday’s statement.

The Turkish Lira was stable in the aftermath of the decision, as the U.S. dollar traded at around 1.60 liras Friday morning. "The relatively muted reaction from the lira É must be encouraging for policymakers, and if the current risk rally sustains more generally, should open the way for further rate cuts," Ash wrote in a note to investors.