March 21, 2019 / 8:03 AM / a month ago

UPDATE 3-Turkey extends tax cuts on goods in face of recession

* Deadlines extended for cars, appliances, furniture

* To support lira, tax also raised on some foreign deposits

* Tax cuts seen giving central bank room for rate cut (Adds central bank data on forex holdings)

By Nevzat Devranoglu

ISTANBUL, March 21 (Reuters) - Turkey took another step to boost consumption and its lira in the face of recession by extending on Thursday the deadline for tax cuts on cars and other goods, and raising the withholding tax on some foreign currency deposits.

Ankara had imposed the tax cuts on goods last year to help tame inflation, which hit a 15-year peak in October and has since eased a bit to settle around 20 percent.

Tax cuts on cars, commercial vehicles and home appliances were extended until June 30, while those on furniture, housing and title deed fees will remain in effect until Dec. 31, an update to the country’s Official Gazette showed.

Previously the tax cuts on all these items were due to end on March 31, the date set for nationwide local elections for which President Tayyip Erdogan has been campaigning in support of his AK Party.

The extension of tax cuts will trim 9 billion lira ($1.65 billion) from government revenues, a Turkish economy official said on Thursday, adding its impact “can be overlooked” given the expected boost to consumption and the overall economy.

The move should postpone a rise in inflation when taxes return to previous levels and could give leeway to the central bank, which is expected to cut interest rates later this year.

“Although our year-end inflation expectation is unchanged, with the impact of continued tax cuts, the price hikes will be postponed until after June,” said Deniz Cicek, economist at QNB Finansbank.

Inflation is expected to fall to around 15 percent by the end of this year, according to the median forecast of a Reuters poll of 15 economists. Markets expect the central bank to start cutting rates, currently at 24 percent, around mid year.

“We see this as a measure that will make it easier for the central bank to cut rates at the MPC meeting in June,” added Cicek.

FOREX DEPOSITS

Separately, the withholding tax on foreign currency time deposits of between six months and one year was raised to 20 percent from 16 percent, the gazette showed.

The withholding tax on foreign currency time deposits of more than a year was raised to 18 percent, from 13 percent.

Forex held by Turkish local individuals hit a record high in the week to March 15, data from the central bank showed on Thursday, signalling sagging confidence in the local lira currency in the wake of last year’s currency crisis.

For institutions and individuals combined, the total forex deposits and funds including precious metals hit another record high to stand at $175.8 billion, the data showed.

Consumer confidence stood at 59.4 points in March, official data also showed on Thursday, recovering some ground since the index hit a near 10-year low in October.

Foreign currency deposits in Turkey’s banking sector account for more than 50 percent of all deposits, which could put pressure on banks if another shock triggers a withdrawal of forex deposits.

Ankara also set the withholding tax on interest from bonds issued abroad by legally obligated institution at 7 percent for bonds with a maturity of up to one year, 3 percent for a maturity between one and three years and zero percent with a maturity of more than three years, according to the gazette.

Last year’s crisis saw the lira lose nearly 30 percent against the dollar, prompting an economic contraction in the fourth quarter. (Writing by Ali Kucukgocmen and Ece Toksabay Editing by Jonathan Spicer)

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