Markets rise as central bank rate cuts continue
Posted by meb at July 18th, 2009
The Central Bank of Turkey again slashed its benchmark interest rate on Thursday evening, this time by 50 basis points, representing the ninth month in a row that rates have been cut. The overnight borrowing rate now stands at a record low of 8.25 percent — a full 8.5 percentage points lower than the 16.75 percent overnight borrowing rate in September.
The bank has suggested that more cuts are in store. In a written statement accompanying the announcement, the bank said it was likely for the cuts to continue, noting, “Recent data releases signal that the recovery in domestic economic activity will be slow and protracted.”
Because inflation concerns remain a distant possibility, “it will be necessary for monetary policy to maintain an easing bias for a long period of time,” the statement read, adding that the bank “envisages that further rate cuts will be necessary in the short term unless there is a robust recovery in economic activity.”
Indeed, first quarter gross domestic product (GDP) contraction clocked in a record 13.8 percent, driven in large part by slumping domestic demand, plummeting exports and a fall of 17.4 percent in industrial production.
When asked if he thought rates would continue to decline, Cevdet Akçay, chief economist at YapiKredi, said: “That is what the bank seems to be signaling. Weak external and domestic demand conditions were referred to in the press release, and so was the expectation for the easing bias to continue unless there is ‘robust’ recovery.”
He suggested, however, that the central bank would have been more successful in achieving the desired effects of the interest rate cuts had it not implemented the last cuts over such a prolonged period of time. “Easing bias has been with us for a while, but the latest 225-basis-point cumulative cut in four meetings could have been at least that much in just two, say 150 basis points in April and another 100 in May or another 150 and then a pause. The signaling could have been stronger, I believe. Fifty-basis-point cuts are ‘about to close the easing cycle’ cuts, and as such, they do not very well serve the purpose of triggering downward adjustments in inflation expectations and thus longer-term interest rates,” Akçay explained.
Eray Berberoğlu from DenizBank’s Economic and Strategic Research Group said he believed that another rate cut could take place in August. “The bank maintains its dovish stance, and its tone is gradually growing softer,” he told Today’s Zaman in an email. “The [central bank] dropped the key expression ‘the committee envisages that the next rate cut may be measured,’ which was consistently used as a signal for further easing in the previous four statements.”
He agreed with the central bank on the unlikelihood of a return of inflation. “The current state of demand conditions rules out a jump in inflation,” Berberoğlu noted. “The underlying inflation is unlikely to surge. The annual rate will not exceed 7 percent by the end of the year.”
The rate of inflation now officially stands at 5.7 percent, up from the 39-year low of 5.2 percent experienced in May. The central bank’s year-end target of 7.5 percent is coming to be seen as a distant possibility by all, including the central bank.
The lira was little affected by the move and was trading at TL 1.5320 against the dollar yesterday in midday trading.
The news also seemed to affect the İstanbul Stock Exchange (İMKB) very little, as the market continued its upward trend.
Although the market closed its first session down 0.28 percent at 38,049.33, it does not appear to be part of any overriding downward trend. In fact, market observers are predicting that the market will surpass the 40,000 mark — a mark not seen since Sept. 9.
Ersagun Şimşek, director of Tera Stock Brokers, said he was not surprised that the İMKB was improving and that developments such as the signing of a letter of intent to go ahead with the Nabucco gas pipeline, a 3,300-kilometer pipeline that is expected to bring Caspian gas through Turkey to Europe, are positive signs to foreign investors that Turkey’s economy will recover more quickly than other emerging markets. “Such projects add confidence in the Turkish markets amongst foreign investors,” he said, adding that he believes that the İMKB could easily pass the 40,000 mark in the weeks ahead. “The expectations in Turkey are better than in many global markets for foreign investors,” he noted.
Markets around the world have been surging ahead over the past week, driven primarily by banks and commodity stocks ahead of earnings results from Citi, Bank of America and General Electric.
London’s FTSE100 appeared poised to close the week at its highest level since January. Shanghai stocks surged yesterday, inching up to a 13-month closing high. In Hong Kong, the benchmark Hang Seng Index closed up at 18,805.66, gaining 6.2 percent in its best weekly advance in seven weeks.
Wall Street’s S&P 500 Futures stumbled yesterday, however, when GE’s earning figures for the second quarter were released revealing a 47 percent decline in profits.
source: Today’s Zaman
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