Jun 17 2019

Turkish central bank cuts rates for buyers of government bonds

Turkey’s central bank cut interest rates for some banks who buy government bonds in regular auctions.

The so-called primary dealers, who include the nation’s largest banks, will be able to borrow from the central bank at an interest rate of 100 basis points below the policy rate of 24 percent, the central bank said in a statement on its website on Monday.

The bank said it was taking the measure “to support the Primary Dealership System in view of its contributions to the deepening of financial markets and the effectiveness of monetary policy.”

Turkey’s government has been calling on the central bank to lower interest rates to help spur economic growth as inflation slowed. Meanwhile, the governing Justice and Development Party (AKP) has offered cheap loans to consumers and businesses via state-run banks.

Earlier this month, the central bank kept its benchmark one-week repo rate at 24 percent but softened its language on interest rates in an accompanying statement. The approach had raised speculation among economists that a rate cut may come as early as next month.

The central bank said on Monday that the amount of capital provided to primary dealers at the lower rate of interest would depend on the amount of government debt they buy in Treasury auctions. Primary dealers are authorised by the government to offer bids on the debt at non-competitive rates in addition to taking part in the auctions.

“This facility will have a limited share within the overall Central Bank funding,” the bank said in the statement.

The decision came after Turkey’s consumer price inflation slowed to 18.7 percent in May from 19.5 percent in April. It had stood at a 15-year high of 25.2 percent in October.

Economists have advised the central bank to keep interest rates on hold to help support the lira, which lost 28 percent of its value against the dollar last year. The currency has fallen an additional 10 percent in 2019, partly due to political tensions surrounding nationwide local elections and a spat with the United States over the purchase of S-400 air defence missiles from Russia.

The central bank had hiked the benchmark rate by 625 basis points last September to prevent the lira sell-off turning into a full-blown financial crisis.

The lira was up 0.2 percent at 5.89 per dollar at 12:37 p.m. local time in Istanbul on Friday, paring earlier gains.

Ratings agency Moody’s cut Turkey’s sovereign debt further into junk territory on Friday citing economic policy concerns.