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Turkey, which has cut its key interest rate more than any other G-20 country, will likely slash it again as inflation slows to closer to the levels of the European Union which the country aims to join.

The Ankara-based central bank will probably reduce the overnight borrowing rate half a percentage point to 7.75 percent tomorrow at 7:00 p.m., according to a Bloomberg survey of nine economists, bringing total cuts in 12 months to 9 percent. The rate was 16.75 percent at the time of the September bankruptcy of Lehman Brothers Holdings Inc.

Consumer-price growth fell to a 39-year low of 5.2 percent in May after slumping demand at home and in European markets led to a 13.8 percent contraction in Turkey’s gross domestic product in the first quarter, the deepest since records began in 1987. In 2001, inflation was about 60 percent and the country needed International Monetary Fund support.

“It may be they’ve broken the back of inflation,” said Timothy Ash, the head of Europe, Middle East and Africa economics at Royal Bank of Scotland Group Plc. “Just in terms of its ability to get by on its own resources, it’s clear that Turkey has narrowed the gap” with eastern European EU members.

Turkish debt levels are within the limits for euro membership. EU inflation criteria say that consumer price growth can’t be more than 1.5 percentage points above the average rate in the three lowest member states. The target in January was 3.9 percent, according to Bloomberg calculations.

EU Average

Turkey has made little progress in three years of EU membership talks. European qualms about letting in a predominantly Muslim country with a standard of living less than a third of the EU average have combined with domestic Turkish infighting to hinder the entry process payday advance.

The government responded to the economic contraction by cutting taxes on cars and home appliances just as surging unemployment forces more spending on social support. The budget deficit may reach 60 billion liras ($40 billion) this year, Industry Minister Nihat Ergun said on Aug 4. That’s almost six times the original plan drawn up last year.

The IMF wants Turkey to draw up a credible plan to reduce that spending as a step toward winning possible new loans. Higher expenditures may mean the rate cuts prove short-lived if the outlays help fuel inflation when the economy recovers.

“Optimists can argue that there has been a paradigm shift,” Ilker Domac, economist for Citigroup Inc. in Istanbul, said in an e-mailed report on Aug. 7. “A more prudent view would put forward that the marked decline in the real interest rate, which cannot be explained by fundamentals, is temporary.”

The central bank’s forecast is for rates to be “further lowered in the short term and held unchanged until the end of 2010,” Governor Durmus Yilmaz said on July 29.

“The crisis has given them that opportunity,” said Turker Hamzaoglu, a London-based economist for Bank of America Corp.- Merrill Lynch & Co, who forecasts a total of about 9.5 percentage points in reductions before the bank stops cutting. “There’s a window of opportunity for a structural break from moderate inflation to a lower level at around 6 percent.”

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