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UPDATE 2-For third straight month, Turkey cenbank cuts top end of rate corridor
May 24, 2016 / 11:21 AM / a year ago

UPDATE 2-For third straight month, Turkey cenbank cuts top end of rate corridor

* Overnight lending rate cut to 9.5 pct

* Inflation cooled to lowest in nearly 3 years

* Fears of political pressure on cenbank (Adds details, background, market comment)

By Seda Sezer and Daren Butler

ISTANBUL, May 24 (Reuters) - Turkey’s central bank cut the top end of its interest rate corridor by an expected 50 basis points on Tuesday, as new Governor Murat Cetinkaya charts a dovish course amid cooling inflation and political pressure for lower rates.

Inflation hit its lowest in nearly three years last month, helped by slowing food prices and boosting expectations that Cetinkaya would cut again - even though inflation remains above the bank’s own target and the lira currency has weakened.

Cetinkaya also faces pressure from President Tayyip Erdogan, who has railed against high interest rates, equating them with treason. Erdogan’s advisers have repeated the call for further rate cuts in recent weeks, intensifying concern about political pressure on the bank.

The bank’s decision “provides further evidence that political pressure to loosen monetary policy is outweighing concerns about the currency,” said William Jackson, an economist at Capital Economics, in a note.

The bank lowered the overnight lending rate - the highest of the multiple rates it uses to set policy - to 9.5 percent. As expected, it left its benchmark rate on hold at 7.5 percent.

It marks the third straight month of easing and the second cut under Cetinkaya. Eleven out of 18 economists in a Reuters poll expected a 50 basis point cut in the upper band. The bank also kept is overnight borrowing rate at 7.25 percent.

The lira firmed to 2.9575 after the decision from 2.9749 beforehand. The currency was also bolstered by news that key members of the economic management team - including Deputy Prime Minister Mehmet Simsek - would keep their posts in the new cabinet.

RE-SHAPE ECONOMY

“Taking into account inflation expectations, pricing behaviour and the course of other factors affecting inflation, the tight monetary policy stance will be maintained,” the bank said in a statement following the decision.

“Recently, inflation has displayed a marked decline, mainly due to unprocessed food prices. However, improvement in the underlying core inflation trend remains limited.”

Some investors have seen the appointment of Cetinkaya - the first Islamic finance expert to hold the position of central bank governor in constitutionally secular Turkey - as part of Erdogan’s drive to re-shape the economy to focus on consumption-led growth.

The president, whose roots are in political Islam, has said that interest rates cause inflation, a stance at odds with orthodox economics. Fears that Erdogan will strengthen his economic grip increased after Ahmet Davutoglu stepped down as prime minister this month and was replaced by Binali Yildirim, a longtime Erdogan ally.

“Even in the face of a 6.5 percent fall in the lira this month, an abrupt repricing of U.S. monetary policy and, crucially, concerns about the politicisation of economic policy following the appointment of an Erdogan loyalist as premier, the central bank still decided to cut rates further,” said Nicholas Spiro of Lauressa Advisory in London.

“Governor Cetinkaya is doing little to allay concerns that Turkish monetary policy is politicised.” (Additional reporting by Humeyra Pamuk; Writing by Seda Sezer; Editing by David Dolan and Ralph Boulton/Richard Balmforth)

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