ANKARA: Turkey's central bank on Tuesday cut its headline interest rate by 25 basis points, ceding a little ground to months of pressure from President Recep Tayyip Erdogan for aggressive easing to stimulate growth.
But economists warned that the bank would be hard pressed to agree many further cuts in the future, with the Turkish lira still under pressure and inflation high.
The bank said in a statement after its latest monetary policy meeting that the one-week repurchase rate would be dropped to 7.50 percent from 7.75 percent.
It trimmed the marginal funding rate slightly more, by 50 basis points, from 11.25 percent to 10.75 percent and the borrowing rate from 7.50 percent to 7.25 percent.
It remains doubtful that the relatively cautious easing will be enough to placate Erdogan, who has accused the nominally independent central bank of "dragging Turkey down" for refusing to countenance an aggressive easing.
The war of words with the central bank governor Erdem Basci has severely damaged the value of the Turkish lira which hit all time lows against the dollar in the last weeks.
The bank said in a statement that it cut the rates on a "measured scale" while keeping a watchful eye on price volatility, with annual inflation moderating but still above seven percent in January.
It said that a "cautious" monetary policy was required to engineer a "persistent reduction in inflation."
"Monetary policy decisions will be conditional on improvements in the inflation outlook," it added.
Prime Minister Ahmet Davutoglu, preparing to lead his party into legislative elections in June, welcomed the cuts but expressed hope more would be on the way.
"We find it positive that there has been a decrease in the interest rate, but we hope for a further decrease," he said on a visit to Hungary.
The bank is under "intense pressure" from the government to loosen monetary policy to create a growth spurt ahead of the polls, said Neil Shearing, chief emerging markets economist at Capital Economics in London.
"A vulnerable currency means that the markets could limit the central bank's room for manoeuvre," he warned in a note to clients.
"We doubt the central bank will be able to lower interest rates much further from here without provoking a reaction in the currency markets," he said, forecasting cuts of just 50 basis points in the repurchase rate by the end of the year.
Ozgur Altug, economist at BGC partners in Istanbul, said that the bank had been hoping to cut by more but had been blocked by the current volatility in prices.
"Depending on the trend in inflation we might see further rate cuts, but it will be limited in our view," he said.
Indeed, the bank may have to consider reversing the easing cycle if the US Federal Reserve begins hiking its rates again in the second half of the year, economists at Finansbank in Istanbul said in a note to clients.
"The central bank does not have much room to deliver further cuts," it said.
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