Turkish central bank cuts forex deposit rates; lira firms

10/03/2015 06:40 AST

The Turkish Central Bank said on Monday it was cutting its interest rates for one-week foreign-exchange deposits, triggering gains in the lira after a week of sharp declines, driven partly by worries over political pressure on the bank.

The lira firmed to 2.6025 against the dollar by 1540 GMT. It hit a record low of 2.6470 late on Friday.

The bank stepped in to support the lira after it fell to record lows on concern about the future make-up of the government's economic team and about pressure exerted by President Tayyip Erdogan on the central bank to cut rates.

Analysts said it was the third time the bank, which has been pressured by key political figures and unable to hike rates, has used back-door methods to stem the lira's decline since last week. It had also increased its daily forex-selling auction amount and tightened lira liquidity slightly.

BGC Partners chief economist Ozgur Altug said the bank's forex deposit facility was used by banks in late 2012 and at that time the rate was much lower.

"Usually, this facility is used in the worst times and we think that seeing the Bank taking some actions against lira depreciation is positive for sentiment," he added.

The central bank said in a statement it was cutting the one-week deposit rate for dollars to 4.5 percent from 7.5 percent, in line with global interest rate developments.

It also cut its one-week euro deposit rate to 2.5 percent from 6.5 percent. The changes will take effect on Tuesday.

MINISTERS TO BRIEF ERDOGAN

Undeterred by the market's negative response to his interference, on Saturday the president told the business community not to profit from the strong dollar.

Prime Minister Ahmet Davutoglu, Central Bank Governor Basci and Deputy Prime Minister Babacan were expected to brief Erdogan in the coming days, closely watched by markets for whether they would negotiate for a hike in rates.

Some analysts argued the political hit from a weak lira, which would cause prices for imports to rise, could be more damaging than from high interest rates.

"(W)e are convinced a weak lira carries enough political pain to temper the government's harsh rhetoric. We believe we have endured the worst of the 2015 election-related pain," Renaissance Capital said, calling on investors to 'buy the dip'.

Turkey's lira earlier came under slight pressure after data showed industrial output fell in January, underlining the growth worries behind the government pressure on the bank to cut rates.

Industrial production fell a calendar-adjusted 2.2 percent year-on-year in January, the data showed, below a Reuters poll forecast of a 1.6 percent rise in output.

Deniz Cicek, economist at Finansbank, said all leading indicators had slowed.

"The main issue for the central bank is inflation, but they also consider growth. As long as the lira continues to fall, I'm not sure how much the central bank can do to counter the growth slowdown," he said.

The main Istanbul stock index closed up 0.42 percent, outperforming a 1.33 percent fall in the emerging markets index. The benchmark 10-year bond yield fell to 8.28 percent from 8.39 percent at Friday's close.

Reuters