S&P economist: Turkish lira stability cuts interest rate

Tuesday, May 27, 2014

Standard & Poor's Chief Economist believes stability of Turkey's currency has caused interest rate cut by the country's central bank.

Standard & Poor's Chief Economist believes stability of Turkey's currency has caused interest rate cut by the country's central bank.

ANKARA – The central bank reduced its one-week repurchase rate from 10 percent to 9.5 percent, but left the borrowing rate unchanged on Thursday for the first time since it was raised to protect the Turkish Lira on January 28.

"With the recent decline in uncertainties and improvement in the risk premium indicators, market interest rates have fallen across all maturities, and the committee decided on a measured decrease in the one week funding rate.” the central bank said in a statement.

Recently Turkey’s Prime Minister Recep Tayyip Erdogan and business leaders called on the bank to lower interest rates citing higher-than-expected growth figures and economic indicators.

Speaking to Anadolu Agency Standard & Poor's Chief Economist Frank Gill commented that “this reduction is an acknowledgement of the relationship between inflation in the country and the exchange rate.  Maybe it’s this relation that the Central Bank is looking at right now.  It seems like they cut rates because the exchange rate has been very stable recently.”

Gil continued saying that the country´s inflation is high and the central bank is likely concerned about meeting their inflation target, but then cutting interest rates is a surprising thing to do.

Annual inflation for Turkey in April was 9.38 percent in consumer prices, and 12.98 percent in producer prices.

Meanwhile Turkey's current account deficit decreased by $5.1 billion to $11.4 billion for the period January-March, according to the central bank mainly due to a reduction in the country’s foreign trade deficit (imports and exports) and an increase in its service sector.

Turkey's total exports stood at $40.2 billion in the first quarter of this year, while imports stood at $57.4 billion. 

“The economy is rebalancing and clearly net exports are making a positive contribution to growth,” Gill said, however, he warned that the current account deficit was a risk in the current environment although it was reducing.

Ratings agency Standard & Poor's has said it expects Turkey´s growth for this year to be around 2.4 percent rising to 2.7 percent next year and according to their chief economist public investments will be a major factor in this growth along with exports.

Gill concluded saying that “Turkey has a pretty competitive contracting sector and there are very large markets especially in Middle East and Northern Africa. Not only Iraq but also Iran which if the sanctions are lifted could potentially open up a really large consumer market for Turkish businesses. And that could really benefit the further performance of export side. Exporters are doing really well.”

Copyright © 2014 Anadolu Agency