Turkey bank under stress to lower cost of borrowing

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ANKARA / Reuters

Turkey’s central bank should have cut interest rates more at this week’s policy meeting, an aide to President Tayyip Erdogan said, in a sign the central bank is likely to remain under pressure to lower the cost of borrowing.
The bank kept its benchmark rate steady for the 13th straight month this week, but cut the upper end of its rate corridor for the first time since February 2015.
Presidential aide Cemil Ertem told broadcaster TRT Haber that the 25-basis point cut in the overnight lending rate – the highest of the three rates the bank uses to set policy – would not be enough to have an impact, however.
“If it had at least cut the upper band by 75 basis points it would have had a more positive impact,” Ertem said, adding the bank’s move will constrain growth.
The central 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. Instead, some analysts saw the move as a sop to Erdogan at Governor Erdem Basci’s last meeting before his term ends next month. Erdogan has repeatedly called for lower rates and has said high interest rates lead to high inflation, a view that is at odds with orthodox economics.
“There is very little economic justification for lowering interest rates,” William Jackson of Capital Economics said in a note following the decision.
“The damage this does to the Bank’s credibility is all the more worrying in light of concerns that a government loyalist will be appointed to take over at the helm of the Bank once Governor Basci’s term ends next month.”
Basci’s future is uncertain, with markets waiting to see whether he is reappointed for another five-year term after April 19.
In a presentation to economists published on its website on Friday, the bank said it had decided to take a “measured” step towards policy simplification, given the easing in global volatility and the lessening need for a wide interest rate corridor.

That was a sign that there may be more cuts to come, said Ugur Kucuk, principal economist at Garanti Bank.
“The message we got from the central bank presentation meeting today is they will continue to cut the upper band of the interest rate corridor if global conditions let them do so,” he said.

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