Turkey cuts key rate again

ISTANBUL – Turkey’s Central Bank cut key interest rates yesterday for the second time in a month, saying low February inflation had increased confidence that an IMF-backed disinflation program was on track. But while markets welcomed the widely expected cut and analysts said more may follow next month, they warned demand for Turkish assets would probably be tempered by fears of war in neighboring Iraq and an apparently persistent recession. Turkey’s central bank said in a statement it was cutting its overnight borrowing rate to 54 percent from 57 percent and its overnight lending rate to 61 percent from 62 percent, citing lower February prices and a stable lira. «These positive developments have increased the credibility of the economic program and assisted in bringing inflation expectations closer to the target,» the bank said. Many Turkish bankers said they anticipated further cuts, perhaps after the release of March inflation data on April 3, to cut borrowing costs and feed economic growth. «The market will now be awaiting March inflation data. There is an expectation of further rate cuts,» said one banker. Turkey’s IMF program aims to cut end-2002 consumer price rises (CPI) to 35 percent, from 73.1 percent in February. It also targets 3-percent economic growth in 2002, though recent trade data suggests the economy has yet to recover from a recession estimated at around 8.5 percent in 2001. The central bank also cut its weekly borrowing rate to 55 percent, from 59 percent. The bank last cut rates on February 20. Markets rise Financial markets in Istanbul were expecting the cut and welcomed it cautiously with an immediate 3-percent rise in the main stock index but the rally evaporated by midday. Yields on the closely watched February 5, 2003, paper fell to 66.25 percent from around 67 percent on Wednesday and the lira rose to best bids of 1,354,000 to the dollar from Wednesday’s 1,359,000, but stocks edged down 0.14 percent. «Most of the people in the market were expecting a two percentage points (cut) so I guess that’s slightly higher than a lot of people were expecting,» said Caroline Gorman, analyst at 4Cast in London. «In the bond market, perhaps the 65-percent level on yields might become the next focus now but the upcoming visit by US Vice President Dick Cheney on March 19 might keep the market cautious,» she said. Cutting the cost of treasury borrowing is a central plank in Turkey’s $16-billion IMF economic recovery program, which aims to help Turkey handle domestic debt of some $90 billion. Cheney’s visit to Istanbul will be closely watched, due to fears that Washington may extend its «war on terrorism» to Iraq, which borders Turkey. Turkey worries that turmoil in a heavily armed neighbor could badly damage tourism revenues, a crucial source of hard currency, and deter already cautious foreign investors. The central bank warned that global oil prices could yet derail the downward path of inflation expectations in Turkey, an emerging market and NATO member country long accustomed to chronic high inflation. «The continued stability of the foreign exchange rate in the coming months and the continued setting of public sector price rises in harmony with target inflation are expected to have a positive effect on inflation expectations,» the bank said, outlining the rationale for its rate cut.

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