Turkey cuts main rates by 2 pct as persistent inflation is tamed

ANKARA – Turkey’s central bank cut interest rates by two percentage points yesterday and signaled more to come, provided economic reforms and falling inflation stay on course. The move, long awaited by Turkish markets, followed inflation data this week that beat market expectations and showed the government’s IMF-backed anti-inflation drive was continuing to bear fruit. «The inflation figures were so encouraging that the central bank had no option but to cut rates,» said Yarkin Cebeci, senior economist at J.P. Morgan Chase in Istanbul. The central bank said it was cutting its benchmark overnight borrowing rate by two percentage points to 24 percent and pruning other rates by the same margin, taking the overnight lending rate to 29 percent. «It will not be a surprise to see further gradual falls in interest rates, so long as financial discipline and sustainable structural reforms continue and inflation remains in line with (the government’s) targets,» the bank said in a statement. Turkish stocks rose slightly, the lira firmed and bond yields narrowed in early trade after the announcement, made as the country’s markets reopened after a three-day public holiday. Analysts said the rate cut, the first since October, was no great shock after January inflation data released on Tuesday showed consumer price inflation remained on a downward trend – a central pillar of Turkey’s $19 billion loan deal with the IMF. Consumer prices rose 0.7 percent month-on-month in January, compared with 0.9 percent in December. The year-on-year rate was 16.2 percent against December’s 18.4 percent – itself a 28-year low that comfortably beat an official 2003 target of 20 percent. The government is chasing an end-2004 target of 12 percent for consumer inflation and analysts say the January figures have improved the chances of it meeting this goal. But many had expected the central bank to hold off until the IMF completes its current review of Turkey’s economic program, or at least until the government produces spending plans requested by the Fund to bridge a budget gap. An IMF mission visited Turkey last month but left without completing the review, and top IMF official Anne Krueger has said it will not return until the government sets out plans on how to pay for above-inflation pension and wage increases. Cebeci said he would have expected a cut of around four percentage points if the IMF had finished its review. «I expect another cut in the next 30 days, provided the review is completed,» he said. Turkey is due to redenominate the lira next year, effectively knocking off six zeros in a long-envisaged move reflecting progress in taming chronic inflation.