Turkish Central Bank rate cut to boost growth: Analysts

ANKARA

The interest rate cut expected by the Turkish Central Bank next week should stimulate economic growth, analysts  said on Thursday.

"We expect a solid boost for the economy," said Ridvan Basturk, an anlyst with ALB Securities in Istanbul. 

Vedat Mizrahi, Director of Research at the Istanbul-based brokerage Unlu&Co. expressed a similar opinion. 

 "We should see a pickup in domestic private consumption, which has been muted in the past couple of quarters," Mizrahi said. "I think this, coupled with the positive wealth effect of lower crude oil prices would result in higher economic growth this year. I expect GDP growth to accelerate from 3 percent in 2014 to 4 percent in 2015."

On Tuesday, Central Bank governor Erdem Basci said declining inflation had allowed the first in a series of interest rate cuts, which was made Jan. 20.

"As long as we keep our cautious stance during the rate reduction period, it is possible that we will see the lowest level of inflation in the past 45 years by the end of 2015," Basci said.

On the same day, the central bank scheduled an emergency meeting of its monetary policy committee to be held Feb. 3. Markets expect the meeting will announce a further cut in the weekly rate at which banks must repay their loans. 

"We expect to see an extended period of rate-cutting," said Atilla Yesilada, a financial analyst at Istanbul Analytics. "The cuts are likely to continue for several weeks and to go as far as 200 basis points. This will definitely benefit segments of the economy."

Michael Harris, head of Turkish Product at Renaissance Capital in London, said the move had merit.

"We think 200 basis points is justified because a weak economy and tumbling inflation legitimize central bank easing," Harris said.

  Basci, the Central Bank governor, has been under pressure from Turkish President Recep Tayyip Erdogan to cut interest rates because the government sees high rates as an obstacle to growth. But Basci has been careful to time the rate cuts to coincide with changes in the inflation outlook.

The news this month is that annual consumer price inflation eased to 8.17 percent in December, from 9.15 percent in November on an anualized basis, according to central bank statistics. 

"This has maintained the credibility of the central bank and built confidence in Turkish monetary policy," Harris said. 

"A financial strategy of strong and balanced growth has three pillars, which can be summed up as low inflation, low real interest rates and cautious borrowing," Basci said last week.

Turkish exporters, who have been lobbying for interest rate cuts, will be pleased. 

"Lower interest rates result in a weaker Turkish lira, which improves Turkish exporters’ competitiveness," Mizrahi said. 

Mehmet Buyukeksi, president of the Turkey Exporters Assembly, made a similar point last July.

"Last week, the Central Bank lowered the loan interest by 0.75 points, to a level of 8.75 percent," Buyukeksi said. "We want the Central Bank to proactively continue with phased interest reductions without lagging behind market dynamics. High interest rates adversely affect decisions to invest in all sectors."

Exporters have expressed concern about the rise in the dollar's value, which makes raw materials more costly. 

"But we are not certain that a stronger dollar has an adverse effect," said Yesilada, the analyst at Istanbul Analytics. "The main dollar-denominated input, oil, has declined in value by 50 percent, while euro area incomes ought to increase, relatively speaking, thanks to quantitative easing by the European Central Bank."

For banks, cheaper money means more flexibility in making loans. And for business borrowers, servicing debt should be less costly.

"Nor will consumer debt spiral out of control as it did in the past," said Yesilada, "because macro prudential controls will hold it in check." Macro prudential controls refer to controls on specific forms of credit, for example down payments on loans. 

In the spring of 2013, for example, Turkish banks saw a surge in profits thanks to interest rate reductions.

Cheaper credit will encourage banks to make more loans to businesses and consumers, Basturk said. This will help boost construction and retail companies, he said.

If the Central Bank of Turkey makes the rate cut the market expects Tuesday, controlling inflation will be the near-term focus.

"What the bank certainly does not want is a repeat of what happened in 2006, or 2014, when the bank cut interest rates and then had to hike them again," Yesilada said.

With growth weak and demand low, many economists don't believe inflation poses an immediate problem.

Another issue is the large amount of dollar-denominated debt held by Turkish companies. Servicing that debt will cost more now that the lira has hit a historic low against the dollar.

"Growth should not become too dependent on external financing," Harris said. 

But if inflation can be kept in check, the central bank will have successfully negotiated a critical turning point in the evolution of Turkey's economy.