February 24, 2015 / 12:31 PM / 4 years ago

REFILE-UPDATE 2-Turkey cuts rates as inflation eases, political pressure rises

(Refiles to replace previous story)

* Main rate cut broadly in line with forecasts

* Volatile food and energy prices spark caution

* Lending rate cut by 50 bps to fuel loan growth

* Bank slightly more dovish on outlook

By Daren Butler

ISTANBUL, Feb 24 (Reuters) - Turkey’s central bank trimmed all of its main interest rates on Tuesday in the face of falling inflation, but still drew fire from a government with one eye on a June election for not cutting them sharply enough.

The bank lowered its main one-week repo rate for the second straight month, trimming it by 25 basis points to 7.5 percent, in line with many economists’ forecasts.

In a bid to fuel loan growth, it also cut its overnight lending rate by a wider-than-expected 50 basis points, lowering commercial banks’ cost of funding.

The central bank struck a slightly more dovish tone on its policy outlook, saying it would keep monetary policy “cautious” — rather than “tight” as it has said in previous months — until there is clear evidence of a significant drop in the outlook for inflation.

But it also dropped a reference to its forecast that inflation would fall to near its target level by mid-2015.

“Given the rising volatility in food and energy prices, the (policy) committee decided to keep the cuts in interest rates measured,” the central bank said in a statement.

Speaking in Budapest minutes after the decision, Prime Minister Ahmet Davutoglu said he had expected more.

“Developments in global commodity prices, domestic political stability and falling inflation led us to expect larger cuts,” he told reporters.

Three weeks ago the bank scrapped plans for an early meeting to lower rates after inflation fell less sharply than it had anticipated in January, drawing thinly veiled criticism from President Tayyip Erdogan.

Erdogan and his ministers have become more insistent in pressing the bank to cut rates as Turkey’s economy has slowed and conflicts in neighbouring countries have intensified.

Borrowing costs have also tumbled in other emerging markets, with no fewer than 20 central banks having eased policy this year to counter global deflationary pressures stemming largely from a weak oil market.


Prior to Tuesday’s decision in Ankara, some analysts had urged the central bank to hold rates, arguing that with inflation still well above target it needed to restore credibility that the political pressure has tarnished.

Of 19 economists polled by Reuters, 14 had expected a cut in the repo rate, with eight forecasting a quarter of a percentage point, five 50 basis points and one 75 points.

“We think there exists a very limited room for CBRT to pull short-term interest rates lower before it reverses these cuts through the second half of the year when the (U.S.) Fed raises interest rates,” said Finansbank economist Gokce Celik.

She noted political pressure to cut rates was likely to continue, causing the lira to weaken further and reducing the central bank’s room for manoeuvre.

Speaking ahead of the rate cut, Finance Minister Mehmet Simsek told Reuters the central bank was independent and would do “what is right” considering domestic and international factors.

According to the bank’s latest survey of business leaders’ and economists’ expectations, consumer prices are expected to rise 6.77 percent in 2015, above the government’s target of 5 percent.

The lira firmed after the data but eased to 2.4815 by 1416 GMT from 2.4780 beforehand. (Additional reporting by Nevzat Devranoglu and Humeyra Pamuk; Marton Dunai and Krisztina Than in Budapest, Rajesh Kumar Singh and Nidhi Verma in New Delhi; Writing by Nick Tattersall; Editing by John Stonestreet and Catherine Evans)

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