* Rate cut is in line with market consensus
* Erdogan has called for sharper move
* Lira firms slightly after rate cut
(Adds analyst comment, details)
By Seda Sezer
ISTANBUL, July 17 Turkey's central bank trimmed
its main interest rate for a third consecutive month on Thursday
but resisted the deep cuts sought by Prime Minister Tayyip
Erdogan weeks ahead of a presidential election.
The bank cut its main one-week repo rate by 50 basis points
to 8.25 percent, saying global liquidity conditions were
improving and the impact of a weak lira on inflation was
tapering off. It has now cut the rate by a combined 175 basis
points since its May meeting.
The central bank kept its overnight lending rate at 12
percent but cut its overnight borrowing rate to 7.5 percent from
"More (rate cuts) could come if risk sentiment remains
decent and the lira does not weaken further," said Anders
Svendsen, chief analyst at Nordea.
Erdogan, in power for 11 years now, is keen to maintain
growth before the August election, in which he is far and away
the leading candidate, and parliamentary polls next year.
Erdogan sees a re-styled presidency as a platform for
greater executive authority. His critics accuse him of amassing
too much power, drawing on a vast majority in parliament, and of
eroding checks and balances such as the judiciary - a trend
also viewed with concern by the European Union that Ankara seeks
Wedded to the idea that high interest rates cause high
inflation, Erdogan has repeatedly called for sharp cuts to
reverse the central bank's massive rate hike in January, when it
was struggling to defend a tumbling lira.
He has accused a foreign-backed "interest rate lobby" of
trying to undermine him and the Turkish economy.
His Economy Minister Nihat Zeybekci said again this month
that the central bank should cut rates to support investment and
The lira firmed slightly after the rate cut to
2.1240 against the dollar from 2.1290 beforehand, while bonds
and stocks were little changed.
"Today's decision actually is supportive for yields and
equities and neutral for the lira ... but once a sell-off in
emerging markets starts (whatever the reason is), Turkey might
be the primary candidate to be sold off," Ozgur Altug, chief
economist at BGC Partners, said in a note to clients.
The market had been pricing in a moderate cut. All 16
economists in a Reuters poll forecast a cut in the one-week repo
rate, with 12 predicting a 50 basis point cut, three a 75 basis
point cut, and one a 25 basis point cut.
Economists had said that looser monetary policy from the
European Central Bank and a continued accommodative stance from
the U.S. Federal Reserve would give the Turkish central bank
room to cut rates further.
But some economists said the inflation outlook did not
justify a rate cut and warned that easier monetary policy could
hinder the fight against rising prices and undermine the
stability of the lira in the event of an adverse shock.
"There's an inescapable feeling that Turkey's central bank
is setting itself up for another clash with markets once
sentiment towards emerging markets assets turns - which it
inevitably will at some point," said Nicholas Spiro, managing
director of London-based Spiro Sovereign Strategy.
"The central bank is throwing all caution to the wind."
The bank's latest monthly survey of business leaders and
economists indicated little improvement in medium-term inflation
expectations, with headline inflation still seen at around 8.3
percent at the end of the year.
Consumer prices climbed 0.31 percent in June month on month,
although on an annual basis inflation fell to 9.16 percent from
9.66 percent a month earlier.
The central bank's year-end inflation forecast is 7.6
(Additional reporting by Ece Toksabay; Editing by Nick
Tattersall and Hugh Lawson)