The Central Bank of Turkey's (CBT) Monetary Policy Board cut the O/N borrowing rate by 50bp to 8.25%. The cut was widely expected. This was the 8th consecutive interest rate cut, bringing total interest rate reductions to 800bp since October 2008. The CBT said it would continue to cut interest rates if there was no clear recovery in economic activity. The bank added that it expected inflation to remain low for a long period.
The bank's continued easing bias is potentially facing a negative reception by the financial markets. Headline CPI inflation rose to 5.7% in June from 5.2% in May and if it continues to rise, the markets could regard additional rate cuts as excessive easing. On the other hand, real interest rates of around 2.5% seem sufficiently prudent, maybe even too tight, given that GDP contracted by 13.8%y/y in 1Q09. In addition, TRY and the government benchmark bond yield have posted further, albeit modest gains, in the last few weeks. Barring adverse external news, we expect the Turkish financial market to absord this interest rate cut without major problems.