Turkey takes cautious 2 percent rate cut; markets remain cool
ISTANBUL (Reuters) – Turkish markets took a widely expected two-percentage-point central bank rate cut in their stride yesterday, with many traders hoping for a deeper cut. Yields on the July 2, 2003 debt fell less than a percentage point in response to 52.73 percent from Friday’s 53.37 percent. The main stock index closed 3.39 percent lower at 12,773.73 as profit-taking trimmed some of the 29 percent rise the index racked up in hectic post-election trade last week. The bank cut its overnight borrowing rate to 44 percent from 46 percent, its first cut since August 5, saying the arrival of a strong government augured well for its task of lowering chronically high inflation. Traders said the market had already bought expectations of a more dramatic rate cut in the wake of the November 3 election, which swept the Justice and Development (AK) Party to power. «You can’t say it had much of an impact… Against expectations of a bigger cut, the central bank went for two points because of worries about inflation. But expectations for a new cut continue, so positions are holding,» said a securities trader for one bank in Istanbul, who asked not to be named. The lira currency held steady at close to four-month highs, closing at best bids of 1,617,000 to the dollar. Breathing space The cut in interest rates underlined the optimism surrounding the AK government, which has pledged loyalty to the underlying principles of Turkey’s $16-billion IMF loan pact. It also gives the treasury welcome breathing space as it wrestles with a huge domestic debt burden of around $85 billion. The treasury will auction 84-day debt today and debt traders expected yields to rise slightly under the combined influence of the lower-than-expected rate cut and the Muslim holy fasting month of Ramadan. Bankers said they expected clients to steer clear of the auction, preferring to stay liquid amid traditional shopping for Ramadan and the public holiday that follows it. The auction, a three-month sale shortened by a week to avoid maturing over another Muslim holiday in February, will set a reference for payments on outstanding floating rate notes (FRN). The IMF plan sees average yields on domestic debt of around 69 percent in 2002. Levels on the secondary market are now comfortably below that and not far off an average of 46 percent seen for the whole of 2003. Bond yields had jumped to well over 70 percent in June 2002 as the political turmoil that led to elections worried investors. Traders said they would now put aside some of the initial euphoria and watch the AK for signs it will keep its pledges. «We think the market will want to see whether the government is behind what it has promised to do,» said Ibrahim Haseski of Garanti Portfolio Management. The AK has yet to announce its budget plans for 2003 or detail what aspects of the IMF pact it wants to revise.