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UPDATE 2-Turkish cbank cuts key rates more than expected

Published 12/18/2008, 01:18 PM

(Adds analyst comment, details, lira, background)

By Daren Butler

ISTANBUL, Dec 18 (Reuters) - Turkey's central bank cut its key overnight rates by a larger-than-expected 125 basis points on Thursday, citing expectations of a clear fall in inflation and a deepening slowdown in economic activity.

Analysts said the aggressive policy move, the second consecutive monthly surprise for financial markets, underlined fears for the 2009 economic outlook and signalled any further rate cuts were likely to be of less magnitude.

The decision had little impact on the lira , which eased slightly to around 1.5 against the dollar from 1.4970 before the announcement.

"The central bank has surprised for the second month in a row," said JP Morgan economist Yarkin Cebeci.

"This decision shows the central bank is concerned about the worsening of growth dynamics but that it is content with the rapid improvement in inflation. In all probability rate cuts will continue but not of this magnitude," he said.

After its monthly monetary policy committee meeting, the bank said it cut the borrowing rate to 15.00 percent from 16.25 and cut the lending rate to 17.50 percent from 18.75 percent.

In a Reuters poll of 23 analysts earlier this month, 21 expected a 50 basis point borrowing rate cut. All 16 analysts polled on the lending rate predicted a cut, with the median forecast being a 100 basis point cut.

"The committee decided to cut short-term interest rates by 125 basis points as it envisages a clear fall in inflation in the coming period," the central bank statement said.

The bank said the latest data pointed to a deepening of the slowdown in economic activity.

"It is expected that problems in the international credit markets and global economy will continue to limit domestic and foreign demand for a long time, continuing to exert downward pressure on inflation," the bank said.

IMF DEAL

Lower oil and other commodity prices were contributing to the positive inflation developments, but uncertainties regarding the impact of the global financial market problems on the real economy remained high, it said.

Turkish gross domestic product growth slowed sharply to a six-year low of 0.5 percent year-on-year in the third quarter. In the five years following a 2001 financial crisis the Turkish economy had grown at some 7 percent annually.

"This is a measure against recession. They need to act early and aggressively the way they did, knowing that the (growth) outlook is so bad," said ING Bank economist Sengul Dagdeviren.

Business leaders and investors are now piling pressure on the government to rapidly agree a fresh loan accord with the International Monetary Fund to replace the $10 billion deal which expired in May.

An IMF team will visit Turkey in early January for talks with Turkish officials and Ankara is expected to sign a stand-by or precautionary stand-by deal with the Fund.

The central bank said the magnitude and timing of further rate cuts would depend on factors influencing the inflation outlook.

Rate-cut expectations were supported by lower-than-expected November inflation data, which showed the consumer price index rose 0.83 percent month-on-month, compared with a forecast rise of 1.02 percent, for a year-on-year rise of 10.76 percent.

In November, the bank cut the borrowing rate by 50 basis points and lowered the lending rate by 100 basis points in what was also a surprise move. (Additional reporting by Thomas Grove and Simla Cinar, writing by Daren Butler)

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