Turkish economy unexpectedly grows

Turkey’s economy unexpectedly expanded in the second quarter from the previous three months, weakening the case for further interest rate cuts by the central bank.

The economy expanded 1.3 per cent on a seasonally adjusted basis from the previous three months, the statistics agency in Ankara said today. Output was expected to be unchanged, according to the median estimate of six economists in a Bloomberg survey. Annual growth was 8.8 per cent, higher than the 6.3 per cent median forecast.

Central Bank of Turkey (CBT) Governor Erdem Basci surprised markets by cutting the benchmark interest rate to a record low of 5.75 per cent last month, as growth slowed from last year. Basci is betting that the need to protect the economy from the risk of recession in Europe, Turkey’s main trade partner, outweighs the threat of a record current account gap run up during the boom.

Second-quarter growth was “much stronger than the Central Bank of Turkey presumed,” Nilufer Sezgin, chief economist at Ekspres Invest, said in an email to clients today. “Even though the CBT’s decisions are motivated by forward-looking data, which signals slowdown in the second half, they may become more cautious in their easing bias.”

Yields on benchmark two-year bonds increased three basis points to 7.95 per cent at 11.50 am in Istanbul. The lira gained 0.1 per cent to 1.7899 and the country’s benchmark stock index pared earlier declines.

Current Account
The statistics agency revised first-quarter growth to 1.7 per cent from 1.4 per cent, and annual growth in the same period to 11.7 per cent from 11 per cent.

Turkey’s current account deficit widened to $5.3 billion in July from $3.6 billion a year earlier, the central bank said today. The 12-month gap rose to a record $74.6 billion, or about 9.5 per cent of economic output.

Basci said last month he expects a “very rapid” improvement in the current account balance in the second half of the year.