Turkey cuts interest rates, political pressures seen

The decision by Turkey´s central bank to cut interest rates, while expected, was seen by some analysts as further evidence that rate-setters in Ankara were bowing to political pressures.

The Turkish Monetary Policy Committee lowered its marginal funding rate from 10.0% to 9.50%, while keeping its borrowing and one-week repo rates unchanged at 7.25% and 7.50%, respectively.

All the decisions were as expected by the analyst consensus.

Tuesday´s decision to cut the main policy rate was taken despite an approximately 6% depreciation in the Turkish lira versus the greenback over recent weeks.

"Recently, inflation has displayed a marked decline, mainly due to unprocessed food prices. However, improvement in the underlying core inflation trend remains limited, necessitating the maintenance of a tight liquidity stance. Future monetary policy decisions will be conditional on the inflation outlook.

"Taking into account inflation expectations, pricing behavior and the course of other factors affecting inflation, the tight monetary policy stance will be maintained," the MPC said in a statement.

That was the result of "growing concerns about a shift towards more authoritarian policymaking under President Erdogan as well as less dovish comments from the US Fed," William Jackson, senior emerging markets economist at Capital Economics said in a research note sent to clients.

"It seems that the Council is being influenced by demands from President Erdogan and his allies for lower interest rates to stimulate the economy.

"Looking ahead, with President Erdogan apparently strengthening his own position in government following the appointment of a loyalist, Binali Yildirim, as Prime Minister, this pressure is likely to continue," he said.

Nevertheless, as of 13:48 BST the US dollar had weakened by 1.33% against the US dollar to reach 2.9554.

Jackson forecast inflation in the Mediterranean country would "stay (just)" inside the monetary authority´s target range of five per cent plus or minus two percentage points over the next few months, before resuming its rise towards the end of the year.

On the back of the above, Jackson expected the overnight lending rate to be lowered to 8.5% by the end of the year.