Turkish central bank cuts rate to boost slowing economy

ANKARA, Turkey (AP) " Turkey's central bank cut a key interest rate for the seventh month in a row on Thursday as it tries to shore up an economy that has been shaken by a series of bombings and an attempted coup.

Voicing what appeared to be increasing worries over the scale of the country's economic slowdown, the bank cut its overnight marginal funding rate to 8.25 percent from 8.5 percent. That means the rate has fallen by 2.5 percentage points since March.

The lower rate is intended to help banks borrow more cheaply from day to day, which could help keep the financial system running smoothly at a time of heightened uncertainty.

Investors cheered the move and the Borsa Istanbul 100 index rose 2.3 percent.

The central bank said recent indicators for the third quarter pointed to a "deceleration" in economic activity and that current "financial conditions are tight."

"With the supportive measures and incentives provided recently, domestic demand is expected to recover starting from the final quarter," said the bank, which also kept its one-week rate at 7.5 percent.

In spite of that hope, analysts noted that changes in the central bank's accompanying statement suggested a more downbeat view than just a month ago following a run of weak economic data " car sales and industrial production are among the measures of the Turkish economy that have registered sharp falls recently.

Turkey's economy has suffered this year in the face of a string of extremist attacks and uncertainty following the failed coup on July 15 that saw more than 270 people killed. Tourism, a key component of the economy as well as a substantial foreign-currency earner, has taken a hit " not least because Russian tourists have stayed away in the wake of a diplomatic spat over Turkey's downing of a Russian warplane last year.

Though the central bank noted that weaker tourism revenues will hurt the economy in the short run, it said the recent fall in the country's currency, the lira, will help improve the nation's current account. Demand from the European Union continues to support exports, it added.

Turkey needs foreign capital to help finance its sizeable current account deficit, which stood at around 4.5 percent of annual GDP in 2015.

William Jackson, senior emerging markets economist at London-based Capital Economics, raised concerns over the country's "growing vulnerabilities," such as the fact that cheaper money may push inflation higher.

"Moreover, contrary to the impression, the current account deficit, which was large to start with, is widening," he said. "That makes Turkey vulnerable to a shock, domestic or external."

The upshot, he said, is that interest rate increases in 2017 are "not out of the question."

An additional fear for many foreign investors is that Turkey is moving toward a more authoritarian model of governance " a trend that could further dent any hopes that the country has of joining the European Union.


Pylas contributed from London.

This story has been automatically published from the Associated Press wire which uses US spellings

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