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Turkish central bank hints at rate cuts after Erdoğan comments - ASHARQ AL-AWSAT English Archive
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Turkey's Prime Minister Tayyip Erdoğan addresses members of parliament from his ruling Justice and Development Party during a meeting at the Turkish parliament in Ankara February 18, 2014. (Reuters/Umit Bektas)

Turkey’s Prime Minister Tayyip Erdoğan addresses members of parliament from his ruling Justice and Development Party during a meeting at the Turkish parliament in Ankara February 18, 2014. (Reuters/Umit Bektas)

Kayseri, Reuters—Turkey’s central bank governor hinted at interest rate cuts for the first time in a year on Monday, but said they would be gradual and the bank alone would decide on their timing.

The head of the Bank, Erdem Basci, spoke three days after Prime Minister Tayyip Erdoğan called for a rate cut, saying his AK Party’s strong showing in recent local elections had boosted markets and lower rates would encourage investors.

The prime minister’s comments revived concern about political pressure on the central bank. Erdoğan has been a vocal critic of high borrowing costs, denouncing what he terms an “interest rate lobby” of speculators.

Speaking at a conference in the central city of Kayseri, Basci trod a careful line, saying “measured” rate cuts were a possibility but that he saw no current need for an extraordinary monetary policy meeting.

“When we cut rates we do it step by step [and] keep our tight stance. We protect both confidence and stability,” he said. “A rate cut with a big volume should not be expected. It’s beneficial to take measured steps.”

He said the bank’s overnight lending rate was “very tight” at 12 percent and that it had “room for maneuver” to reduce it gradually to 10 percent if needed.

Basci had made no mention of rate cuts at a meeting with economists in London on Thursday, the day before Erdoğan’s call, several of those who attended the event said.

“This is a confusing way for them to conduct monetary policy, as there is no consistency from week to week,” Tatha Ghose, senior emerging markets economist at Commerzbank in London, told Reuters.

“Even last week, Basci mentioned that he would be keeping an eye on long-term inflation expectations before he eases policy again,” she said.

Short-term bond yields fell on Basci’s comments. The two-year benchmark yield dropped to 10.34 percent from 10.50 percent. The lira weakened to 2.1240 to the dollar from 2.1086 at the end of last week, while stocks outperformed emerging markets peers.

The central bank stunned markets with a massive rate hike at the end of January, ignoring political pressure—Erdoğan had spoken against such a move just hours earlier—as it battled to defend the lira after it slumped to record lows.

Basci said in London on Thursday that the bank’s current policy was sufficient to tackle inflation, even though consumer prices rose more than expected in March.

Several economists, surprised by Basci’s comments on Monday, said any talk of rate cuts looked premature.

“In our view, considering that headline inflation stands above 8 percent while core indicators recently breached 9 percent, it is too early to start talking about policy rate cuts,” said Deniz Cicek, economist at Finansbank in Istanbul.

The bank has already been easing liquidity by providing more funding at its repo auctions, a move that TEB-BNP Paribas strategist Erkin Isik said meant interbank rates were likely to slip to 11.5 percent from 12.0 percent in the coming days.

“They have ample room to ease through liquidity policy first, before resorting to rate cuts,” Isik said.

“If they ease interbank rates to 10 percent without seeing an improvement in inflation outlook, that would be a substantial move and I think would impair the strong performance of lira.”

Turkey’s growth in the past decade has largely been based on the stability seen since Erdoğan came to power in 2002. But growth is slowing, inflation stays above target and consumer confidence hit a four-year low in February. Erdoğan is expected to run in the presidential election in August.