Turkey’s industrial output slows

Turkish industrial output rose a much less-than-expected 1.5 per cent year-on-year in January, pointing to a sharp slowdown in growth and strengthening the case for the central bank to cut interest rates to stimulate the economy. The output growth rate, the lowest in more than two years, was well below a Reuters poll forecast of 4 per cent, although analysts pointed to an exceptionally high base effect. On a seasonally adjusted basis, industrial production was down 3.1 per cent from a month earlier, data from the Turkish Statistics Institute showed on Thursday. Manufacturing accounts for around a quarter of Turkey’s gross domestic product, growth in which is forecast to slow to 2.3 per cent this year, according to the International Monetary Fund, down from more than 8 per cent expected for 2011. The government expects 4 per cent GDP growth this year. “The data is far below expectations and points to an economic slowdown. This will strengthen the TCMB’s (central bank’s) hand in cutting interest rates,” said Garanti Securities strategist Tufan Comert. “We expect the benchmark bond yield to fall towards 9 per cent due to buying on this expectation. It may not have much impact on the exchange rate,” he added. The yield on Turkey’s benchmark bond declined to 9.14 per cent after the data, from a previous close of 9.38 per cent. The lira firmed to 1.7745 against the dollar from 1.7876 late on Wednesday, boosted by improved global risk sentiment. Last month the central bank made a surprise 100 basis point cut in its overnight lending rate to 11.5 per cent as receding concerns regarding the weaker lira and gaping current account deficit gave it room to boost growth. Turkey remains vulnerable to external shocks and, given its dependence on imported energy, rising oil prices would pose a significant risk if tensions between Iran and the West were to increase over the Islamic Republic’s nuclear programme. The central bank’s monetary policy committee meets next on March 27, when some analysts expect it will again lower the upper band of its interest rate corridor. The bank’s overnight borrowing rate is now 5 per cent, while its policy rate, the one-week repo rate, is at 5.75 per cent. Inflation in Turkey is just over 10 per cent, almost double the bank’s main interest rate, reflecting the bank’s practice of managing monetary policy mainly through banking sector liquidity rather than via its benchmark interest rate as is conventional. The bank’s mix of a low policy rate, higher required reserve ratios, and a wide gap between borrowing and lending rates is designed to curb Turkey’s high current account deficit and contain risks from the volatile lira.