Turkey’s central bank cuts rates by 2 percent as inflation drops

ANKARA – The Turkish central bank cut interest rates by two percentage points yesterday in response to a continued sharp improvement in inflation that is central to a $19 billion loan deal with the International Monetary Fund. The cut, which came as no surprise after sparkling February inflation figures and agreement on the IMF’s latest review of the economy, took the benchmark overnight borrowing rate to 22 percent and the overnight lending rate to 27 percent. «The impressive decline in inflation in the first two months of the year, the absence of visible pressure from domestic demand, (and) currency stability… strengthens our view that the year-end inflation target can be reached,» the central bank said. The government aims to cut inflation to an IMF-backed target of 12 percent at the end of 2004, compared with last year’s year-end figure of 18.4 percent – itself an 18-year low that comfortably beat the 2003 target of 20 percent. Turkish shares and bonds were slightly firmer after the cut, with the main share index rising 0.19 percent in early trade and yields on benchmark April 27, 2005 bonds narrowing to 23.99 percent from Tuesday’s 24.15 percent. «There was not a great reaction in the market as this rate cut was to a large extent already in prices,» said one banker. «After this, March inflation figures and new rate cut signals will be determining factors.» February data two weeks ago showed consumer price inflation had fallen to 14.28 percent year-on-year, the lowest annual rate since January 1977. A subsequent central bank survey showed expectations for year-end consumer price inflation had fallen to meet the government’s 12 percent target, and the bank said that had also contributed to its decision to cut rates. The central bank last cut key interest rates in early February, also by two percentage points, after January consumer price inflation came in at 16.2 percent year on year. Cutting chronically high inflation is a central plank of Turkey’s $19 billion IMF loan deal, which has helped haul the country out of deep recession following a 2001 financial crisis. On Saturday, the government and the IMF said they had agreed on the steps to be taken after the latest review of the rescue program, which was delayed by IMF worries over a budget gap. «We all knew (the central bank) would wait for some kind of nod from the IMF on the seventh review,» said Mina Toksoz, head of country risk at Standard Bank in London. Toksoz said the rate cut had been slightly smaller than some in the market had predicted, and more could follow. But she added the government might have trouble continuing to cut inflation at the same fast pace for the rest of the year.

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