CENTRAL BANK CUTS POLICY RATE TO HISTORIC LOW

UNCLAS ANKARA 000571


DEPT FOR EEB/IFD/OMA SNOW, TREASURY FOR WEISS, VELTRI,
PARODI

E.O. 12958: N/A
TAGS: EFIN ECON TU
SUBJECT: CENTRAL BANK CUTS POLICY RATE TO HISTORIC LOW


1. Summary: On April 16, the Central Bank of the Republic
of Turkey (CBRT) announced the Monetary Policy Committee cut
its overnight borrowing rate to 9.75% from 10.50% and its
overnight lending rate to 12.25% from 13.00%. Policy rate
cuts since November 2008 have totaled 700 basis points (bp)
and, for the first time since the 1960s, the overnight rate
eased to single digits. Economists expect CBRT will continue
rate cuts to bring down market interest rates, which should
help to boost economic activity in Turkey. End summary.


2. The CBRT Monetary Policy Committee (MPC) held its monthly
meeting April 16 and announced a 75 basis point rate cut in
its policy rates, higher than the 50 bp market expectation.
The MPC cut its benchmark rate (overnight borrowing rate) to
9.75%, which is a level not seen since the 1960s. Market
economists such as Yarkin Cebeci from JP Morgan and Baturalp
Candemir from EFG Istanbul expect rate cuts to continue,
especially after recent jumps in unemployment, which
increased to 15.5% in January 2009 with 3.6 million
unemployed, up 1.1 million year on year. Industrial output
was also weak, dropping 23.7% in February 2009. The
government revised downward its real GDP growth assumption
for 2009 from plus 4% to a much more realistic minus 3.6% on
April 13, which also may have factored into the CBRT's
decision. Earlier this week, CBRT Governor Durmus Yilmaz
expressed concern over the gloomy economic outlook.


3. In the note released with the rate decision, CBRT
signaled further rate cuts, which might come in smaller
increments. CBRT said that the slowdown in economic activity
will continue, since there has been no concrete sign that
global recovery has begun. Downward pressure on inflation
will continue since economic recovery will take time, and
future rate cuts may be more measured. The Central Bank
stated that downward flexibility in monetary policy is likely
to remain for the foreseeable future. The CBRT also took
into account the Turkish Lira's stability over the last month
and limited negative effects from foreign exchange weakness
early in 2009.


4. Comment: Although the rate cuts were slightly more robust
than expected, markets were not rattled. The bond market
began pricing in this rate cut at the beginning of the week
(April 13) and government bond rates hit a compound annual
level of 12.5% in the secondary market. On April 17, rates
dropped to 12.38% following the MPC announcement. Bank
lending rates are still high and range from 20-70% depending
on the type of loan and the borrower, but we expect CBRT rate
cuts will force down commercial market rates, and act as a
key catalyst for growth in the second half of 2009. End
comment.

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Jeffrey