* Market consensus was for a 50 basis point cut
* Lira, bond yields stable after the decision
* Bank credibility seen in the balance
(Adds analyst comment, details)
By Seda Sezer
ISTANBUL, June 24 Turkey's central bank cut its
main interest rate slightly more than expected on Tuesday, but
stopped short of jeopardising its credibility with the sort of
deeper move sought by Prime Minister Tayyip Erdogan ahead of an
The bank cut its main one-week repo rate by 75 basis points
to 8.75 percent, saying inflation was expected to start falling
significantly from this month and that global liquidity
conditions had recently improved.
Erdogan, determined to maintain growth ahead of the August
presidential election and parliamentary polls next year, has
been a frequent critic of central bank policy and has repeatedly
made populist calls for lower interest rates.
The lira firmed to 2.1280 from 2.1320 against
the dollar immediately after the decision, apparently on relief
that the bank had not yielded to political pressure and cut
rates more sharply. It later eased back to trade broadly flat.
"This move is slightly more dovish than what the market
anticipated, but the market is taking the view that the central
bank has earned some credibility and inflation is indeed on its
way down," said Manik Narain, a strategist at UBS in London.
The market had been pricing in a moderate cut after Central
Bank Governor Erdem Basci said last week the bank could lower
rates if the inflation outlook was improving significantly.
But annual inflation stood at 9.66 percent in May, well
above the central bank's year-end forecast for 7.6 percent and
its 5 percent medium-term target. The bank has repeatedly said
it expects inflation to start falling from June.
"The (central bank) is trying to balance the need to
maintain credibility in the markets on the one hand and
government pressure to lower interest rates substantially on the
other," William Jackson, an economist at Capital Economics in
London, said in a note to clients.
"The larger the size of the easing cycle, the greater the
risk that the (bank) will damage its own credibility and the
more vulnerable the economy will become to a shock that causes
investors to pull back ... The conditions aren't in place for a
marked and sustainable reduction in interest rates," he said.
Economists had said that looser monetary policy from the
European Central Bank, an expected deceleration in Turkish
inflation in the coming months and declining bond yields would
prompt the central bank to make a measured rate cut.
Some analysts said too sharp a move could undermine the
lira, which has already been underperforming its emerging market
peers since the recent Islamist insurgency sweeping neighbouring
Iraq, Turkey's second-biggest export market.
All 20 economists in a Reuters poll forecast a cut in the
one-week repo rate, with 16 predicting a 50 basis point cut,
three a 75 basis point cut, and one a 25 basis point cut.
The bank kept its overnight lending rate at 12 percent and
its overnight borrowing rate at 8 percent, giving it the
flexibility to adjust banks' funding costs as needed.
BACK TO JANUARY LEVELS
Last month the central bank cut its one-week repo rate by 50
basis points, its first cut in a year. Erdogan belittled the
move as not enough to unwind its sharp hike in January, when it
raised the rate by 550 basis points.
"Are you kidding? When you raise (interest rates) you do it
by 5 percentage points at once, when you cut, only half a
percentage point," he was quoted as saying a few days later.
His economy minister, Nihat Zeybekci, said on Monday the
central bank should bring interest rates back at least to where
they were before late January, when the one-week repo rate stood
at 4.5 percent, although he acknowledged he did not expect this
to happen immediately.
The comments unnerved investors.
"It was already patently clear last month that Turkey's
central bank was keen to reverse January's dramatic rate hikes
at the cost of undermining its inflation-fighting credentials,"
said Nicholas Spiro, head of Spiro Sovereign Strategy in London.
"The more the central bank loosens monetary policy, the more
this reinforces the perception that it is succumbing to
political pressure," he told Reuters.
Deputy Prime Ministers Bulent Arinc and Ali Babacan, and
others including Finance Minister Mehmet Simsek, have played
down concerns about political interference, saying the
government fully understands the need for an independent central
bank and does not interfere in monetary policy.
But Erdogan, who is widely expected to contest and win the
August presidential election, has frequently railed against an
"interest rate lobby" of speculators he sees as trying to drive
up rates at the expense of the Turkish economy.
"It's difficult to predict how much further the central bank
will reduce interest rates from here on," said Jackson.
"But given the increasingly aggressive rhetoric from the
government and the fact that the markets are allowing the MPC to
lower rates - there was no market reaction to today's move - the
easing cycle could be significant."
(Additional reporting by Nevzat Devranoglu and Daren Butler in
Istanbul, Sujata Rao in London; Writing by Nick Tattersall;
editing by Ralph Boulton)