Turkish rates seen declining 75 bps
ISTANBUL – Turkey’s central bank is seen as cutting rates another 75 basis points by the end of the year, but the surprise cut it made on Thursday has hit its credibility, posing a risk further out, a Reuters poll showed yesterday. The bank’s 25-basis-point cut on Thursday – its first in 14 months – shocked the market, particularly after Governor Durmus Yilmaz said last week that a premature cut could backfire and that easing could start in the fourth quarter. A poll of 21 economists gave a median forecast of another 75-basis-point cut this year, although 10 economists saw an easing of just 50 basis points from the current rate of 17.25 percent. Stocks and bonds rose yesterday and the lira was flat as analysts said rate cuts have a long way to go before Turkey loses its edge over other markets in the carry trade – where investors borrow cheap yen to invest in high-yielding markets. But economists said the central bank’s credibility – which suffered last year amid a major market sell-off – could be in danger once again for failing to communicate with the market. «The point is not that they cut rates, but that Yilmaz clearly signaled something different very recently,» said Lars Christensen, economist at Danske Bank. «Furthermore, we are certainly not out of the woods in terms of the global credit crunch, so this is certainly not the time to play around with credibility,» he said, referring to a recent sell-off on concerns about credit markets. The lira tends to be particularly vulnerable to changes in market sentiment because of a large current account deficit. But in the recent sell-off, it has held up well and still stands 11 percent above end-2006 levels. A few economists said the bank’s move was reasonable, as it was a small cut only a month sooner than many expected. «The central bank is leading the bond market, rather than lagging it,» said Debbie Orgill, economist at ABN Amro. But local economists were also taken aback and some suggested political pressure had been exerted on the independent central bank. Several politicians and industrialists have called for a cut as Turkey’s very high rates have bitten into demand and brought second-quarter growth down to 3.9 percent – well below a year-end target of 5 percent. Some saw the growth data as the catalyst for the rate cut. »Yesterday’s rate cut might very well be seen as premature in a few weeks’ time (remember April 2006?), and this could have large credibility costs,» said Inan Demir, economist at Finansbank in Istanbul. In April last year the bank cut rates, only to find that month’s inflation came in three times above forecast, sparking the market sell-off. That eventually brought a 425-basis-point hike in rates and since then the bank has slowly been regaining its credibility, economists say. High rates have tamed inflation but expectations are still well above the central bank’s year-end target of 4 percent. The latest survey of the market and business community pointed to year-end inflation rate of 7.13 percent.
