ANKARA (Reuters) – Turkey’s central bank cut its key interest rate by two percentage points yesterday, saying economic stability was helping curb inflationary pressures and surprising markets with the timing and size of the move. In its first rate move since a mid-March cut, the bank lowered the main overnight borrowing rate to 20 percent from 22 percent and the overnight lending rate to 24 percent from 27 percent. «The fall in inflation expectations, increased competition and continued monetary and fiscal discipline are limiting the effect of cost increases on prices,» the bank said. It cited lower money demand, a slowdown in car sales and reduced bank lending as signs that the pace of economic activity could rise more slowly over the rest of the year. Turkish assets rose on the news, with stocks pushing more than 2 percent above Tuesday’s record close. The lira and bond prices also firmed. Most analysts had seen the bank keeping rates on hold for a while longer after August inflation data came in at or slightly above expectations, ticking back above 10 percent on an annual basis on the back of higher oil prices and a weaker lira. «The markets have been waiting for a rate cut, but certainly not for today,» Baskent Securities’ Ersan Namyeter said. Turkey has made major strides in slashing inflation, which was in triple digits as recently as 1995, as a central pillar of its $19-billion loan deal with the International Monetary Fund. Annual consumer price inflation fell below 10 percent in May for the first time in 32 years, and the country is widely expected to beat its IMF-backed year-end inflation target of 12 percent for both consumer and wholesale prices. Sooner than expected But August data disappointed many analysts, with currency depreciation and oil prices near $50 a barrel nudging annual inflation to just over 10 percent. Most took that as a sign that there would be no imminent rate cut, especially while uncertainty remained over Turkey’s European Union bid and details of a new deal with the IMF, although further easing was expected before the end of the year. EU leaders will decide in December whether to open full entry talks with Turkey, drawing on European Commission recommendations due on October 6. The country is expected to start talks with the IMF this month on a new loan accord to replace the current three-year deal, which expires in February. The size of the cut also took some by surprise, coming at the upper end of expectations. But investors took it as a sign that the economy was stable and IMF relations were smooth. The main share index rose as much as 2.1 percent above Tuesday’s record close of 21,119 points, ending the morning session 2.03 percent higher at 21,546.93. The yield on the benchmark February 22, 2006 bond shrank by nearly 1 percent to 24.46 percent. The lira also firmed, creeping below 1,500,000 million to the dollar before slipping back to around 1,504,000, not far off Tuesday’s 1,507,000. But some said the rate cut was unlikely to ease concern over Turkey’s swelling current account deficit, fuelled partly by strong consumer imports. «Only last week, the central bank was arguing that relatively high interest rates would eventually work to weaken consumer credit and import demand,» said Tim Ash of Bear Stearns.