Turkish central bank slashes key lending rate by 3 pct, to 38 pct

ISTANBUL – Turkey’s central bank announced yesterday it had cut its main overnight interest rate by three percentage points to 38 percent, stressing it was not bowing to government pressure. The cut comes after weeks of demands from the government and business to take action to help weaken the lira currency and follows inflation data on Tuesday that many analysts said provided no clear-cut reason for a rate cut. The bank said in a statement that its action was «not an intervention aimed at the exchange rate» and stressed the complex relation between interest rates and exchange rates. The lira firmed immediately after the rate cut announcement, trading at around 1,425,000 to the dollar from Tuesday’s close of 1,440,000. Foreign exchange traders said a hefty redemption of around $1.6 billion in maturing dollar debt to the market also meant the market was heavy with dollars. «I think it’s normal for the lira to move between 1,420,000 to 1,450,000… (Yesterday’s) redemption and the result of the central bank’s (daily) dollar purchase auction will set the tone,» said one forex trader for a foreign bank in Istanbul who asked not to be named. The central bank said recent lira strength had supported its fight against inflation. Turkey imports nearly all its fuel. «The fact that the Turkish lira is appreciating… means it will support the fall in inflation,» it said, listing factors that it said supported its decision to cut rates. It last cut rates, again by three percentage points, on April 25. Many analysts had expected the bank to wait until Turkey had sealed the next $500 million loan payout from the International Monetary Fund. The bank, however, said it was heartened by recent talks with the IMF on the loan pact, delayed by Turkey’s slow legislation of key structural reforms. «It is seen that steps to address these problems are being taken, or soon will be, and so the delays can be overcome,» the bank said. News of the rate cut brought a rise in Turkish debt and the lira, analysts said. The busiest July 7, 2004 debt firmed more than one percentage point to 47.65 percent in early trade. «I think it was the right thing to cut at this point… We will have inflationary pressure diminishing, and with agricultural prices falling we can expect some negative inflation figures for the next couple of months,» said Volkan Kurt at ABN Amro. The bank said steps to lower electricity prices were also positive for the bank’s goal of meeting a year-end target of 20 percent consumer inflation (CPI). Annual CPI was 30.7 percent in May, a rise from the previous month. The bank said that the rise «should not be seen as negative,» predicting lower inflation in the second half of the year supported by lower agricultural and manufacturing price rises. It also welcomed steps to rein in spending in social security. But the bank warned of signs of growing domestic demand as a possible risk for future inflation.

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