* First rate cut for a year comes weeks after Erdogan call
* ECB, Fed policy stance gave room for manoeuvre
* Inflation remains stubbornly high
* Two-year bond yields drops to lowest in 6 months
By Seda Sezer
ISTANBUL, May 22 Turkey's central bank surprised
markets with its first rate cut in a year on Thursday, weeks
after Prime Minister Tayyip Erdogan called for rates to fall -
reviving questions about political pressure on the bank.
The bank said "decreasing uncertainty" and an improvement in
risk-premium indicators prompted the 50-basis-point cut in its
one-week repo rate to 9.5 percent. Yields on Turkey's two-year
bond slid to a six-month low after the announcement.
Economists said expectations that the European Central Bank
would loosen policy and that the U.S. Federal Reserve would not
raise rates anytime soon had given Turkey room for manoeuvre.
The cheap global liquidity that has helped it finance its
current account deficit looks set to continue for some time.
But the timing of the rate cut, after inflation rose more
than expected in April, caught many by surprise. Analysts had
expected a reduction only after headline inflation started
ticking lower in the second half of the year.
Only two of 13 economists in a Reuters poll had forecast a
cut this month. The bank kept its overnight lending rate at 12
percent and overnight borrowing rate at 8 percent.
"This was a politically driven rate cut, facilitated by the
marked improvement in sentiment towards Turkish and emerging-
market assets over the past few months," said Nicholas Spiro,
head of Spiro Sovereign Strategy in London.
"Today's rate cut looks and feels like the start of a
slippery slope for a central bank still struggling to conduct a
credible and transparent monetary policy and at a time when
sentiment towards emerging markets still remains fragile."
Erdogan, anxious to maintain a record of strong economic
growth before his expected bid in August's presidential
election, called last month for a rate cut. The victory of his
ruling party in local elections, he said, had reduced political
uncertainty and such a move would reassure investors.
Erdogan has long been a strident opponent of high borrowing
costs, accusing an "interest rate lobby" of foreign investors
and speculators of conspiring to drive up rates at the expense
of Turkey's economic health.
He has had a difficult year, with anti-government protests
last summer, a corruption scandal dogging his inner circle in
December, and a mine disaster last week drawing renewed
criticism of his leadership. The last thing he needs as the
presidential election approaches is a marked economic slowdown.
Central Bank Governor Erdem Basci appeared to have been
resisting any such pressure, saying politicians had a right to
their views but insisting that the central bank had a free hand.
He said last month he saw room for a gradual lowering in
rates but ruled out a deep cycle of easing. Policy would stay
tight until there was a clear improvement in the inflation
outlook, he said.
"With the recent decline in uncertainties and improvement in
the risk premium indicators, market interest rates have fallen
across all maturities," the bank said in a statement after its
monetary policy committee meeting.
The lira was little changed after the decision, hovering
around 2.09 to the dollar. Turkey's 2-year benchmark
bond yield fell to 8.83 percent, its lowest
since Nov. 20 last year, from 9.10 percent at Thursday's close.
Analysts had expected rate cuts further ahead once headline
inflation started coming down, forecasting it would start to
fall from mid-year. Inflation rose to a higher-than-expected
9.38 percent year-on-year in April.
The central bank also expects inflation to begin falling in
June but still sees it at an above-target 7.6 percent at year
end. The bank has repeatedly said it will keep monetary policy
tight until the inflation outlook improves significantly, a
message it repeated on Thursday.
"It's giving a signal to Ankara that it cut rates by
slashing the one-week repo rate 50 basis points, but overnight
market interest rates hover around 11 percent," said Ugur
Gurses, a former central banker and newspaper columnist.
"The central bank is going back to its old self, giving one
signal to Ankara and another to the market," he told Reuters.
The bank raised rates sharply at the end of January to
combat a fall in the lira to record lows. It had already been
reducing average borrowing costs without resorting to rate cuts,
by providing more funding to the market through its one-week
repo auctions. Those carry a fixed simple rate of 10 percent,
rather than the 12 percent marginal lending rate.
The average cost of borrowing had fallen to
around 10.0 percent as a result, from levels of around 10.2-10.3
percent in late March.
(Additional reporting by Asli Kandemir and Dasha Afanasieva;
Writing by Nick Tattersall; Editing by Ralph Boulton, Larry