Turkey Central Bank in firing line as Ankara demands deeper rate cuts

ministers says 50 basis point cut is not enough to support economic growth

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Turkey’s central bank lowered its main interest rate on Tuesday and drew a swift rebuke from government ministers who said the 50 basis point cut, five months ahead of a parliamentary election, was not enough to support economic growth.

The barrage of complaints from Deputy Prime Minister Numan Kurtulmus, Economy Minister Nihat Zeybekci and presidential adviser Yigit Bulut sent the lira to a two-week low amid concerns over growing political pressure on monetary policy.

The bank trimmed its main one-week repo rate by 50 basis points to 7.75 percent in response to slowing inflation, a sharper cut than many economists had expected, but left other interest rates on hold.

Hours later, Kurtulmus took to Twitter to say the bank’s move was “at odds” with the government’s economic vision.

“With this decision it has unfortunately become more difficult to achieve growth, employment and inflation targets,” he wrote.

Last week, President Tayyip Erdogan warned he might summon central bank officials if they did not respond to his repeated calls for lower rates to boost growth.

The lira initially firmed after the rate cut as traders voiced relief that the bank had not yielded to political pressure with a deeper reduction. After the ministers’ comments, it dropped to 2.35 to the dollar, its weakest since Jan. 5.

“It’s hard to say (the rate cut) is just due to political pressure because there was a downside surprise in inflation in December,” Finansbank economist Gokce Celik said.

“But the comments from government are damaging the credibility of the central bank. Even if they (the bank) did it for economic reasons, that’s not what it looks like from outside.”

Growing Pressure

Bolstering economic growth would improve the ruling AK Party’s prospects of winning a two-thirds majority in the June election and thereby help Erdogan in his drive to build a strong executive presidency.

Economic growth slowed to 1.7 percent year-on-year in the third quarter, below a Reuters forecast of 3 percent, indicating the government will not meet its 4 percent full-year target.

The central bank’s battle against inflation, even as the economy slows and conflict continues in neighboring countries, has been helped by the slide in global oil and commodity prices.

Tuesday’s decision came after data showed annual consumer price inflation eased to 8.17 percent in December from 9.15 percent in November. The latest central bank survey of business leaders pointed to end-2015 inflation of 6.82 percent, still above the 5 percent target.

Of 20 economists polled by Reuters, 11 had expected a cut in the main rate, with eight forecasting a quarter of a percentage point reduction and three anticipating a 50 basis point cut.

The bank described Tuesday’s rate cut as “measured” and said it would keep its overall monetary policy tight until there was a significant improvement in the inflation outlook.

But with Economy Minister Zeybekci already calling for cuts in other interest rates and presidential adviser Bulut suggesting it take further action at an extraordinary meeting, that aim could prove increasingly difficult.

“The fact that the central bank opted to cut rates -- and fairly aggressively at that -- despite an inflation rate that remains way above its target says much about the conduct of Turkish monetary policy,” said Nicholas Spiro of Spiro Sovereign Strategy in London.

“Once again, questions will be raised about the independence of Turkey’s central bank.”

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