Turkish benchmark rate reduced

09-19-2009 09:02

The Central Bank of the Republic of Turkey cut its benchmark interest rate by half of a percentage point as it also stated that it may continue the most rigorous cycle of reductions among the G-20 countries, while inflation shows the weakest pace in almost four decades. Turkey’s central bank cut its overnight borrowing rate to an unprecedented 7.25% this Thursday. The bank in Ankara will publish its minutes of the assembly in eight working days.

Turkish benchmark rate

Durmus Yilmaz, governor of the Turkish central bank, has cut the rate by 9.5 percentage points within 11 months in order to reduce the most intense slump in its history. The bank commented this Thursday that quantitative easing measures may be continued for an “undetermined period of time.”
Yarkin Cebeci, an economist for JPMorgan Chase & Co. in Istanbul, commented: “There are no indications that the series may be brought to an end on the near term.” He also forecasts a quarter-point reduction in October previous to the central bank ending the cycle of cuts. “If anything happens, additional rate reductions are likely to be the threat.”

Sluggish and gradual

The pace of the economic improvement will determine additional rate reductions, while the recovery is expected to be “sluggish and gradual,” according to the central bank. A clear improvement in employment is lacking, while a recovery in national consumption in the three months through June could collapse in the third quarter, stated the Turkish central bank.
In the second quarter, GDP contracted by 7% on a yearly basis, while it shrank an unprecedented 14.3% in the first quarter, proved by figures by the official statistics office on September 10. The jobless rate increased to 13% during the period that ended July 31 as a result of the contraction, from 9.4% in the corresponding period of the previous year, the statistics office reported on September 15.
The IMF and Turkey have been in consultation during more than 12 months regarding a possible loan accord in order to strengthen the economy against the weakening pace. The administration defined yesterday a plan to diminish the budget deficit and lower borrowing in three years, while the plan could be the foundation of a new loan agreement with the International Monetary Fund.

From negative to stable

The outlook on the Turkish credit rating has been modified from negative to stable by Standard & Poor's (S&P) Ratings Services today, after Wednesday’s plan to cut borrowing rate. Standard & Poor’s Ratings Services stated: “The modification of the outlook demonstrates that risks regarding external funding reduced and the release of the government’s fiscal plan concerning the midterm, which in our opinion will diminish the insecurity of the Turkish fiscal route.” They also confirmed its rating regarding BB/B local currency and BB-/B foreign currency. Inflation in August weakened to 5.3% in comparison to July’s 5.4%, moving towards February’s level of 5.2%.

Turkey’s central bank has set the target rate for this year at 7.5%, while its most recent review among economists and businessmen predicts a rate of 5.6% for the end of this year. The Turkish central bank stated on July 29 that it would most likely lower rates on the near term, while remaining them until the end of 2009.