Swaps show next Turkish central banker will cut rates

ANKARA: Forget the Turkish government's pronouncements on the need for lower borrowing costs. The central bank will probably keep cutting them anyway, according to the swaps market. Swaps that gauge one-month interest-rate expectations for the overnight-lending rate in two months time closed at 9.83 percent on Wednesday, the lowest since July. While they have since risen about three basis points, that's still 65 basis points below the upper end of the rates corridor. The drop comes less than a month before central bank Governor Erdem Basci's term expires.

Turkey's central bank last week reduced interest rates for the first time in about a year as inflation slowed and global volatility eased amid bets the Federal Reserve will raise borrowing costs gradually. The cut marked the first step in meeting a pledge to abandon the bank's three-tiered system in favor of a single-rate policy. The central bank, which has been criticized by President Recep Tayyip Erdogan and other officials for keeping rates too high, cited lower volatility for diminishing the need for a wide corridor.

"If the markets continue like this, I don't think that the central bank will remain shy of further cuts to the upper band," Evren Kirikoglu, an Istanbul-based strategist at Turkish lender Akbank TAS, said by e-mail. "Their entire case was that the global volatility is down and that inflation expectations are easing. Inflation this month will be low anyway."

Federal Reserve Chair Janet Yellen this week reasserted the central bank's gradual approach to raising interest rates, which "means that another cut is almost certain," Kirikoglu said. A socalled fear gauge Turkey's central bank uses to track investor anxiety, the Chicago Board Options Exchange Volatility Index, on Wednesday was at the lowest level since August and headed for its first monthly decline since October.

The yield on two year government bonds on Wednesday fell below 10 percent for the first time since November, dropping 13 basis points to 9.99 percent. The bond's rally this quarter is the biggest in emerging markets after Indonesia and Brazil, data shows.