Turkey cbank seen cutting rates by 50 bps – Inflation at 3-yr low

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ISTANBUL, June 17, (RTRS): Turkey’s central bank is expected to lower the top end of its interest rate corridor for the fourth straight month next week, a Reuters poll showed, as inflation stays near a three-year low and after the US Fed reined in its projection for rate hikes.

All but one of the 17 analysts surveyed by Reuters predicted a cut of 50 basis points in the overnight lending rate, now at 9.50 percent – the highest of the three rates the bank uses to set policy.

The central bank has cut the overnight lending rate by a total of 125 basis points over the last three months as inflation, particularly food inflation, cooled. The cuts have come as President Tayyip Erdogan has repeatedly called for a lower cost of credit.

Core inflation, which strips out volatile food and energy prices, fell to 8.8 percent in May, a sharper drop than expected. Still, economists say the core figure remains high.

“Lower inflation – with core inflation falling more than expected in May – and the perception that the Fed will hike rates more slowly, create an opportunity for a rate cut in June. We think the central bank would like to use that opportunity,” said Asli Savranoglu, chief economist at Burgan Securities.

“On the other hand, after rate cuts, our worries over medium-term inflation and volatility in the lira continue.”

Inflation is still above the bank’s 5 percent target. It is expected to reach 7.64 percent by the end of the year, according to a central bank survey released on Thursday.

The US Federal Reserve signalled on Wednesday it still planned to raise rates twice in 2016, though it said slower economic growth would crimp the pace of monetary policy tightening in future years.

President Tayyip Erdogan’s drive for lower rates continues to hold sway over monetary policy. Erdogan says high interest rates cause inflation – a stance at odds with orthodox economics – and has equated high rates with treason.

“Some countries groan bitterly under the oppression of interest rates. With my country being at the forefront. Interest rates are meaningful when they are a tool to encourage investment. If not, they turn into a tool for oppression,” he said this week at a dinner to break the Ramadan fast with foreign ambassadors.

The bank has left its benchmark one-week repo rate at 7.5 percent for 15 consecutive months. None of the economists expect a reduction in the benchmark rate, while one predicted a 25 basis-point cut in the overnight borrowing rate.

The previous central bank governor, Erdem Basci, was the architect of Turkey’s complex interest rate corridor, which uses a system of multiple rates and is aimed at achieving price stability and financial stability simultaneously.

The bank controls the corridor between its lending and borrowing rates by adjusting the volumes of money available at each rate. As a result, a reduction in the upper band does not necessarily mean a change in borrowing costs.

The average cost of funding stood at 8.26 percent as of Thursday.

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