The Turkish Central Bank’s surprise rate cut might hint an IMF deal would be sealed soon.
Experts were completely caught by surprise when the Turkish Central Bank cut interest rates unexpectedly in its meeting on Wednesday. It cut its borrowing rate 50 basis points to 16.25 percent and its lending rate by 100 percent to 18.75 percent.
Economists slammed this completely unexpected decision and declared it a “risky and dangerous” move in their initial research notes released right after the Central Bank’s announcement.
On Thursday, however, media reports suggested Turkish Prime Minister Tayyip Erdogan told at a party meeting that the government is close to signing a $20-40 billion deal with the IMF, signaling an important shift in their attitude towards the fund.
The mood in the markets shifted as the rate cuts may have come with the knowledge that the IMF deal is close to be finalized. This news might have given relief to the central bank, and expanded its room to maneuver in rate cuts citing growth concerns.
The central bank took the risk of a sharp depreciation of lira currency against the dollar. In such case the bank said it would take additional measures to increase dollar liquidity.
And it now appears more obvious that the Turkish Central Bank is relying on the new IMF deal.
The new IMF deal is expected to relieve the markets with a fresh liquidity injection and soothe concerns that fiscal discipline would be harmed ahead of the local elections in March 2009