Azernews.Az

By Bloomberg

Turkish bonds advanced and the lira swung between gains and losses after Turkey’s central bank delivered a “measured” interest-rate cut amid government calls for lower borrowing costs.

The yield on two-year notes fell 26 basis points to 8.05 percent at 2:39 p.m. in Istanbul as the central bank cut the benchmark one-week repurchase rate by 25 basis points to 7.5 percent. The lira was little changed at 2.4750 per dollar after rising and falling as much as 0.5 percent. The central bank also lowered the overnight lending and borrowing rates, the first time it cut all three rates at the same meeting in 22 months.

“The central bank in Turkey has delivered a measured rate cut,” Bernd Berg, the director of emerging-markets strategy at Societe Generale SA in London, said by instant message Tuesday. “The central bank did not deliver the big bazooka of a dramatic rate cut to please the government as some market participants expected. Pressure on the lira could re-intensify as pressure on the central bank to cut rates further will not abate.”

Central bank Governor Erdem Basci has been under persistent attack from President Recep Tayyip Erdogan and members of the government to cut borrowing costs since the bank more than doubled its main rate in January last year to halt a slide in the lira. Concern that the independence of the central bank is being eroded has unnerved investors sending the lira to record lows while two-year note yields have risen 1.3 percentage points this month.

Three Cuts

Thirteen of 18 analysts in a Bloomberg survey predicted the central bank would lower the benchmark rate, with the median estimate a 25 basis-point reduction.

Policy makers cut the overnight lending rate, which is used to tighten liquidity and limit swings in the lira, by 50 basis points to 10.75 percent, compared with a median prediction of 25 basis points. The overnight borrowing rate was reduced by 25 basis points to 7.25 percent, while economists forecast a 50 basis-point cut.

“Cutting the upper bound of the interest-rate corridor by 50 basis points, they will most likely continue to keep liquidity conditions tight,” Erkin Isik, a fixed-income strategist at Turk Economi Bankasi AS, said Tuesday by instant message. “Still, this lowers the line of defense for the central bank to defend the currency, in case of negative developments.”

Inflation slowed to 7.2 percent last month, the least since November 2013. Consumer-price growth will slow to 6.25 percent this year, according to the median of 20 estimates compiled by Bloomberg.

Adult Influence

The central bank has lowered its benchmark one-week repurchase rate by 2.5 percentage points since raising it to 10 percent in January last year.

Basci, who says the key determinant for rates is inflation expectations, earlier this month canceled an emergency meeting to review borrowing costs after inflation in January fell less than the 1 percentage point threshold he had set.

“One could portray this as Basci trying to pull a fast one on Erdogan,” Paul McNamara, who helps oversee $6.3 billion of debt at GAM UK Ltd. in London, said by e-mail. “The fact of signaling reluctance to comply with politicians’ push for big across-the-board cuts, suggests that the adults have a bit more influence than had previously been generally thought.”